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INSURANCE 

PRINCIPLES    AND     PRACTICES 


By 
ROBERT  RIEGEL,  Ph.D. 

Professor  of  Insurance  and  Statistics,  JVharton  School  of  Finance 
and  Commerce,  University  of  Pennsylvania 


and 


H.  J.  LOMAN,  A.M. 

Assistant  Professor  of  Insurance,  Wharton  School  of  Finance  and  Commerce, 

University  of  Pennsylvania 


SECOND  EDITION 


J       ^       »>     J       J  •     • 

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New  York 
PRENTICE-HALL,  Inc. 

1922 


Copyright,  1921,  1922,  by 

PRENTICE-HALL,  Inc. 

All  rights  reserved 


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He. 


Dedicated  to 

Professor  S.  S.  HUEBNER 

A  Pioneer  in  Insurance  Education 


PREFACE  TO  THE  SECOND  EDITION 

The  very  kind  reception  accorded  this  work  has  made  possi- 
ble a  new  edition.  In  availing  ourselves  of  this  opportunity, 
the  method  of  presentation  has  remained  the  same,  having 
amply  demonstrated  its  adaptability  for  business  and  teaching 
purposes.  The  authors  are  especially  grateful  for  the  state- 
ments of  appreciation  received  from  the  insurance  press  and 
members  of  the  insurance  profession.  A  number  of  the  minor 
errors  which  seem  inevitable  in  a  first  edition  have  been  elimi- 
nated, some  miscalculations  have  been  corrected,  and  some 
chapters  have  been  brought  up  to  date,  although  no  work  deal- 
ing with  the  ever-changing  business  of  insurance  can  wholly 
keep  pace  therewith.  The  authors  are  indebted  to  Dr.  R.  H, 
Blanchard  and  Messrs.  I.  Bendiner  and  H.  W.  Glover  for 
some  criticisms  and  corrections  embodied  in  this  revision. 

R.  R. 
H.  J.  L. 

September,  ig22. 


IV 


PREFACE  TO  THE  FIRST  EDITION 

The  significance  of  insurance  as  a  factor  in  private  and  busi- 
ness life  has  increased  tremendously  in  the  past  ten  years.  Dur- 
ing that  time  new  forms  of  protection  have  been  devised,  the 
scope  of  coverage  of  policies  has  been  extensively  broad- 
ened, mathematical  problems  have  received  more  scientific 
treatment,  methods  have  been  modified  by  legal  requirements 
and  the  treatment  of  policy-holders  has  immeasurably  im- 
proved; all  of  which  have  popularized  insurance  and  extended 
its  usefulness.  This  progress  has  entailed  increased  specializa- 
tion and  complexity,  which  require  ( 1 )  more  intelligent  buying 
of  insurance,  (2)  a  broader  knowledge  of  the  business  by 
agents  and  (3)  a  wider  recognition  of  the  necessity  of  insur- 
ance education  in  the  training  of  prospective  business  men. 

This  volume  Is  an  exposition  of  the  principles  and  practices 
of  the  more  important  forms  of  insurance.  An  effort  has  been 
made  to  prevent  practices  from  obscuring  principles;  on  the 
other  hand  sufficient  illustrations  and  forms  have  been  in- 
cluded to  vivify  and  emphasize  the  principles  discussed.  In 
brief,  an  attempt  has  been  made  to  write  a  "practical"  book 
which  is  something  more  than  a  mere  compilation  of  facts  and 
which  will  serve  equally  well  as  a  text-book  for  commercial 
education  in  universities  and  schools  of  business  and  a  guide  to 
the  business  man  in  insurance  transactions. 

The  first  section  is  an  effort  to  coordinate  those  features  of 
insurance  which  are  common  to  all  its  branches.  Here  the 
economic  services  and  business  uses  of  insurance  are  explained, 
the  fundamental  principles  summarized  and  the  organization 
of  the  business  described. 

Section  Two  deals  with  personal  insurance,  which  everyone 
at  least  once  in  his  life  finds  occasion  to  purchase,  and  particular 
emphasis  has  been  placed  upon  the  buyer's  viewpoint.  The 
application  of  the  various  types  of  life  insurance  policies  to  in- 
dividual circumstances,  the  factors  which  enter  into  the  cost  of 
insurance,  the  methods  of  providing  for  expenses,  and  the  re- 
serves, loan  privileges  and  surrender  values  which  flow  from 
the  level  premium  method  are  all  discussed  in  some  detail  be- 
cause of  their  fundamental  character.  The  origin  and  nature 
of  dividends,  the  legal  questions  connected  with  insurable  in- 
terest, the  beneficiary  and  assignment,  fraternal  insurance,  the 

V. 


vl  PREFACE 

disability  clause,  industrial  insurance  and  group  policies  are  also 
fully  explained.  Not  the  least  important  part  of  this  section  is 
that  dealing  with  accident  and  health  insurance,  of  which  no 
adequate  discussion  has  ever  appeared  in  book  form. 

Section  Three  describes  a  relatively  new  form  of  protection 
which  is  of  interest  to  every  employer — compensation  insur- 
ance. It  includes  a  description  of  the  nature  of  the  contract, 
the  advantages  of  the  compensation  system,  the  methods  by 
which  claims  are  settled,  the  factors  controlling  rates  and  the 
methods  of  regulating  reserves. 

Section  Four  deals  with  fire  insurance,  covering  the  mort- 
gagee's interest  In  policies,  agency  and  brokerage,  under- 
writers' associations  and  their  services,  an  analysis  of  the  new 
standard  fire  policy,  a  description  of  the  modification  of  the 
contract  by  clauses  and  endorsements,  a  discussion  of  the  older 
and  newer  systems  of  ratemaking,  the  importance  and  regula- 
tion of  the  fire  insurance  reserve  and  the  procedure  of  settling 
losses. 

Section  Five,  on  marine  insurance,  attempts  to  present 
within  a  limited  space  the  principal  features  of  the  business. 
Attention  is  concentrated  on  those  phases  which  are  of  excep- 
tional Interest  to  the  insured — the  types  of  policies,  the  extent 
of  protection  which  Is  afforded,  endorsements  and  the  settle- 
ment of  various  types  of  losses. 

Section  Six  explains  the  principal  features  of  title  insurance 
and  corporate  bonding  and  also  gives  a  description  of  two 
forms  of  insurance  not  heretofore  adequately  covered  by  text- 
books— automobile  insurance  and  credit  insurance,  both  of 
which  have  experienced  considerable  change  and  development 
within  recent  years. 

In  all  of  these  sections  an  effort  has  been  made  to  eliminate 
details  which  are  superfluous  or  tend  to  obscure  the  principles 
and  methods  involved  and  at  the  same  time  to  sufficiently  de- 
scribe the  customs  and  practices  of  the  business.  To  this  end 
the  volume  is  provided  with  a  large  collection  of  policies  and 
forms  In  common  use  which  in  some  cases  supplement  as  well 
as  illustrate  the  text.  In  furnishing  reports,  forms  and  infor- 
mation regarding  rates  and  practices  insurance  men  and  state 
officials  have  been  uniformly  kind  and  courteous  and  it  is  a 
pleasure  to  acknowledge  the  very  great  assistance  derived 
therefrom. 

R.  R. 
H.  J.  L. 


CONTENTS 
PART  I— INSURANCE  IN  GENERAL 

CHAPTER  PAGE 

I — The  Uses  of  Insurance 3 

Insurance  as  a  factor  in  business;  Insurance  introduces  security  in 
business  undertakings;  Insurance  increases  business  efficiency; 
Insurance  tends  toward  the  equitable  assessment  of  costs;  Insur- 
ance serves  as  a  basis  for  credit.  The  capitalization  of  earning 
power;  Insurance  makes  saving  possible;  Insurance  as  an  invest- 
ment; Insurance  promotes  thrift;  Insurance  as  a  provision  for  old 
age;   Community  benefits  of  insurance.  X 

II — Fundamental  Principles  of  Insurance     .      .     19 

Definition  of  insurance;  Essential  requirements  for  the  proper  oper- 
ation of  insurance;  Necessity  and  nature  of  insurable  interest; 
Principles  of  probability;  The  law  of  average;  Consequences  of 
the  law  of  average  in  insurance;  Differences  between  life  and 
other  forms  of  insurance. 

Ill — Types  of  Insurance  Organizations     .      .      .     28 

Six  classes  of  insurance  organizations;  The  advantageous  and 
disadvantageous  features  of  self  insurance;  Mutual  insurance 
companies;  Reciprocal  or  interinsurance  organizations;  Favor- 
able and  unfavorable  features  of  Stock  companies;  Lloyds  asso- 
ciations; Insurance  by  the  State;  Government  insurance. 

IV — Organization  of  the  Business     .....     39 

Organization  of  companies  for  personal  insurance;  The  field 
force;  General  agency  and  branch  office  systems;  Agents;  Organ- 
ization of  the  property  insurance  business;  General  agents;  Special 
agents;  Local  agents;  Brokers;  Life  and  casualty  underwriters' 
associations;  Fire  underwriters'  associations;  Types  of  under- 
writers' associations;  Example  of  a  national  association;  Services 
of  national  associations;  Nature  and  functions  of  sectional  and  local 
associations. 

PART  II— PERSONAL  INSURANCE 
V — Types  of  Life  Insurance  Policies     .      .      .      .     53 

Importance  of  selecting  the  proper  policy;  The  single-premium 
policy;  Uses  of  a  single-premium  policy;  Term  insurance;  Uses 
of  term  insurance;  Ordinary  life  policies;  Their  uses;  Limited 
payment  policies;  Uses  of  the  limited  payment  form;  Endowments; 
Uses  of  the  endowment  policy;  Annuities  and  their  uses;  Install- 
ment insurance;  Combinations  of  various  features;  Special  con- 
tracts involving  two  or  more  lives;  Special  contracts  adjusting 
the  premium  or  face  of  the  policy. 

Vll 


viil  CONTENTS 

CHAPTER  PACE 

VI — Net  and  Gross  Life  Insurance  Premiums     .     71 

Life  insurance  premiums  and  "cost  of  production";  Elements  of  cost 
in  life  insurance;  Mortality  tables;  Principle  of  probability;  Com- 
pound interest;  Natural  premium  (five  year  term  policy);  Net 
single  premium  (five  year  term  policy)  ;  Net  single  premium  (whole 
life  policy)  ;  Net  single  premium  (endowment  policy)  ;  Annual  pre- 
miums; Expenses  as  an  element  of  cost;  Kinds  of  expenses;  Meth- 
ods of  loading  for  expenses;   State  regulation  of  expenses. 

yil — Reserves,  Surrender  Values  AND  Loans     .      .     89 

Reserves,  surrender  values  and  policy  loans;  The  reserve  under 
various  systems  of  premium  payment;  Effect  of  interest  rate  on  the 
reserve;  Size  and  importance  of  the  reserve;  Individual  reserves 
on  different  types  of  policies;  Calculation  of  the  reserve;  The  pros- 
pective and  retrospective  methods;  Special  methods  of  valuing  the 
reserve;  The  preliminary  term  and  select  and  ultimate  methods; 
Cash  surrender  values  and  surrender  charges;  Development  and 
use  of  the  "cash  value"  clause;  Other  guaranteed  value  options; 
Policy  loans  described;  Extent  and  nature  of  policy  loans;  advan- 
tages and  disadvantages  of  policy  loans;  State  supervision  for 
the  protection  of  the   policy-holder. 

VIII — Surplus  and  Dividends 110 

The  origin  of  surplus;  Participating  and  non-participating  policies; 
Method  of  apportioning  surplus;  Distribution  of  surplus;  Divisible 
surplus  and  the  nature  of  dividends;  Size  and  importance  of  divi- 
dends; Comparison  of  participating  and  non-participating  con- 
tracts; Time  of  distribution  of  dividends;  Special  forms  of  divi- 
dends; Sources  of  dividends;  Dividend  options. 

IX — Insurable  Interest,  the  Beneficiary  and  As- 
signment         119 

Description  of  insurable  interest;  Interest  of  a  person  in  his  own 
life;  Interest  of  a  relative;  A  pecuniary  interest;  The  beneficiary 
defined;  Reserving  the  right  to  change  the  beneficiary;  The  im- 
portance of  this  right;  Right  of  revocation  not  reserved;  Purpose 
of  assignment  of  policies;  Methods  of  assignment;  Other  legal 
phases  of   life  insurance;   The  application;   Settlement  of  claims. 

X — Special  Forms  of  Life  Insurance     .      .      .      .;  126 

History  and  description  of  fraternal  insurance;  Differences  be- 
tween fraternal  and  "old  line'"  insurance;  Defects  of  fraternal 
insurance  in  the  past  and  the  possibilities  of  the  future;  Assessment 
insurance;  Origin  and  purpose  of  industrial  insurance;  The  sys- 
tem explained;  Cost  of  industrial  insurance;  Advantages  of 
industrial  insurance;  Nature  of  group  insurance;  Process  of  insur- 
ing a  group;  Factors  affecting  the  group  insurance  premium; 
Advantages  of  group  insurance  to  the  group,  the  employer  and  the 
community;  Insurance  of  sub-standard  lives;  Its  purpose;  Var- 
ious methods  of  rating  sub-standard  lives. 


CONTENTS  ix 

CHAPTER  PAGE 

XI — Accident  AND  Health  Insurance     .      .      .      .138 

Losses  due  to  accident  and  disease;  Disability  clauses  in  life  insur- 
ance policies;  Coverage  by  separate  accident  and  health  contracts; 
Types  of  policies;  Limited  and  unlimited  policies;  Non-cancellable 
policies;  The  principal  provisions  of  accident  and  health  policies; 
Important  things  to  examine  in  accident  and  health  policies;  Acci- 
dent and  health  insurance  rates;  Compulsory  health  insurance; 
Arguments  for  and  against  compulsory  health  insurance. 


PART  III— LIABILITY  AND  COMPENSATION 

INSURANCE 

XII — Liability  AND  Compensation  Insurance     .      .155 

Social  insurance;  Definition  of  liability-  and  compensation  insur- 
ance; Industrial  accidents;  Distribution  of  accidents;  Prevention 
of  accidents  and  insurance  against  consequences  of;  Industrial  dis- 
eases; The  law  of  negligence;  Liability  insurance;  The  liability 
policy;  Liability  rates;  The  principle  of  workmen's  compensation; 
Nature  of  compensation  laws;  Accidents  covered  by  the  laws;  Bene- 
ficiaries; Benefits  paid;  Methods  of  insurance;  The  compensation 
policy;  Workmen's  compensation  rates;  Manual  rates;  Schedule 
rating;  Experience  rating;  Liability  and  compensation  insurance 
reserves;  Methods  of  state  regulation. 


PART  IV— FIRE  INSURANCE 
XIII — Insurable  Interest  in  Fire  Insurance     .      .187 

Reasons  for  insurable  interest;  What  constitutes  insurable  interest; 
Classification  of  insurable  interests;  Protecting  the  mortgagee; 
Various  methods  of  protecting  a  mortgagee's  interest;  Their  ad- 
vantages and  disadvantages;  The  standard  mortgagee  clause; 
Policy  provision  relating  to  assignment  of  fire  insurance  policies; 
Method  of  assigning;  Effect  of  assignment  before  a  loss;  Effect 
of   assignment   after   a   loss. 

XIV — The  Fire  Insurance  Contract     .      .      .      .199 

Development  of  the  standard  fire  policy;  Provisions  of  the  new 
New  York  standard  policy;  Parties  to  the  contract;  The  rate, 
premium  and  consideration;  Extent  of  protection  afforded  by  the 
policy;  Events  covered  by  the  policy;  Amounts  covered  by  the 
policy;  Inception  and  termination  of  the  contract;  Suspension  of 
the  policy;  Voidance  of  the  policy;  Loss  settlements. 


X  CONTENTS 

CHAPTER  PACE 

XV — Fire  Insurance  Forms  and  Clauses     .      .      .   222 

The  purpose  of  endorsements;  Descriptive  forms;  Forms  relating 
to  ownership;  Forms  relating  to  the  description  of  the  property; 
Forms  covering  more  than  one  location;  Forms  covering  other  than 
direct  loss;  Use  and  occupancy  insurance;  Rent  insurance;  Profits 
insurance;  Sprinkler  leakage  insurance;  Clauses;  Clauses  of  per- 
mission; Clauses  decreasing  the  liability  or  hazard;  Clauses  re- 
specting title  or  interest;  Emergency  clauses;  Clauses  limiting  the 
amount  payable;  Coinsurance  clause;  Average  clause. 

XVI — Fire  Insurance  Rates  .      .      .      .  -  .      .      .   234 

Divisions  of  the  subject;  The  factors  involved;  Classification; 
Judgment  rating;  Schedule  rating;  Experience  rating;  Classifica- 
tion of  fire  insurance  rates;  Minimum  rates;  Schedule  rates;  The 
Universal  Mercantile  Schedule;  The  Analytic  sj'stem;  The  Ex- 
perience Grading  and  Rating  Schedule;  State  regulation  of  rates. 

XVII — Fire  Insurance  Reserve 245 

Definition  of  the  reserve;  Object  of  the  reserve;  The  reserve  as 
a  trust  fund;  Financial  importance  of  the  reserve;  Calculation 
of  the  reserve;  State  legislation  relating  to  the  reserve;  Criti- 
ci'sm  of  existing  reserve  requirements. 

XVIII — Settlement  of  Losses     ,.,     ......  257 

Classification  of  provisions  applying  to  loss  settlements;  Provisions 
referring  to  the  preservation  of  the  property;  Estimation  of  the 
amount  of  loss;  Agreement  and  appraisal;  Subrogation  and  net  lia- 
bility of   the   companj"^;    Non-concurrent   policies. 


PART  V— MARINE  INSURANCE 


XIX — Marine  Insurance 269 

Nature  of  the  contract;  Factors  essential  to  a  valid  contract;  Types 
of  underwriters;  Different  classes  of  policies;  Policies  classified 
according  to  the  interest  of  the  insured,  the  valuation  of  the  sub- 
ject matter,  the  term  of  the  policy,  the  description  of  the  subject 
matter  and  the  scope  of  coverage;  Uses  of  various  types  of  poli- 
cies; Analysis  of  the  policy;  Description  of  the  property;  Incep- 
tion and  termination  of  the  contract;  Perils  covered  by  the  policy; 
Various  types  of  losses;  General  and  particular  average;  Total 
and  partial  losses;  Expenditures;  Factors  influencing  marine  in- 
surance rates;  The  subject  of  insurance;  The  insured;  Nature 
of  the  trade;  Statistical  experience;  Competition;  Policy  condi- 
tions;   Underwriting  judgment. 


CONTENTS  xi 

PART  VI— OTHER  FORMS  OF  CASUALTY 

INSURANCE 

CHAPTER  PAGE 

XX — Automobile  Insurance 299 

Types  of  automobile  coverage  and  types  of  companies;  Liability 
insurance  policies;  Property  damage  policies;  Liability  and  prop- 
erty damage  rates;  Factors  influencing  rates  on  private  passenger 
cars;  Public  automobiles;  Commercial  automobiles;  Manufactur- 
ers' and  dealers'  cars;  Collision  insurance  policy;  Collision  in- 
surance rates  on  private  passenger  cars;  Commercial  cars;  Pub- 
lic and  livery  vehicles;  Manufacturers'  and  dealers'  cars;  The 
fire  insurance  policy;  Factors  affecting  fire  insurance  rates  on  priv- 
ate passenger  cars;  Livery  and  renting  automobiles;  Commercial 
vehicles;    Manufacturers'    and    dealers'    cars;    Theft    insurance. 

XXI — Title  Insurance .311 

Land  titles;  The  lawyer's  abstract  and  its  defects;  Guarantee  of 
title  by  an  insurance  company;  The  operations  of  a  title  company; 
Extent  of  the  guarantee;  Extent,  of  the  title  business;  Types  of 
policies;  Policy  covering  owner's  risk;  Policy  covering  mortgagee's 
risks;    Special   policies;   The   premium;    Guaranteed   mortgages. 

XXII — Credit  Insurance 322 

Causes  of  business  failures;  Necessity  for  credit  insurance;  Gen- 
eral plan  of  credit  insurance;  Types  of  policies;  Limited  and  un- 
limited policies;  Principal  provisions  of  credit  insurance  policies; 
The  services  of  credit  insurance. 

XXIII — Corporate  Bonding 336 

Development  of  corporate  suretyship;  Nature  of  suretyship;  Ad- 
vantages of  corporate  bonding;  Divisions  of  the  subject;  Bonds 
covering  honesty  only;  Fidelity  bonds;  Account  bonds;  Bonds 
involving  financial  strength  only;  Appeal  bonds;  Bonds  for  costs; 
Bonds  involving  honesty  and  ability;  Public  official  bonds;  Fidu- 
ciary bonds;  License  bonds;  Bonds  involving  honesty,  ability  and 
financial  strength;  Contract  bonds;  Franchise  bonds;  Depository 
bonds;  Bonds  involving  honesty  and  financial  strength;  Bonds 
for  lost  instruments;  Internal  revenue  bonds;  custom  house  bonds; 
Factors   affecting  bonding  premiums  . 

Bibliography 351 

Appendices 359 


INDEX  TO  APPENDICES 

PAGE 

I.  Application  for  Life  Insurance   (Part  I) 361 

II.  Application  for  Life  Insurance   (Part  II) 363 

III.  Endowment  Life  Insurance  Policy 367 

IV.  Disability  Clause 370 

V,  Agent's  Renewal  Contract   (Life) 372 

VI.  Sample  Page  of  Life  Insurance  Rate  Book 378 

VII.  Sample  Page  of  Industrial  Life  Insurance  Rate  Book  .      .      .   379 

VIIL  Assignment  Blank    (Life) 380 

IX.  Policy  Loan  Agreement 381 

X.  Release  of  Interest 382 

XL  Surrender   of   Policy 382 

XIL  Proof  of  Death  (Claimant's  Statement) 383 

XIIL  Proof  of  Death   (Agent's  Statement) 387 

XIV.  Wisconsin  Valuation  Report  on  Fraternal  Societies     .      .      .388 
XV.  Summary    of    Operations    of    War    Risk    Insurance    Bureau 

(Life) 390 

XVI.  Accident  and  Health  Policy.     Form  No.  1 391 

XVII.  Accident  and  Health  Policy.     Form  No.  2 395 

XVIII.  Accident  and  Health  Policy.     Form  No.  3 399 

XIX.  Accident  and  Health  Rates 402 

XX.  Scope  of  Compensation  Laws  of  the  United  States  .      .     .     .403 
XXL  Compensation    States    Classified    According  to    Whether   the 

Law  is  Compulsory  or  Elective 403 

XXII.  Compulsory  Compensation  States,  Classified  as  to  Different 

Kinds  of  Insurance  Allowed 404 

XXIIL  Universal   Standard  Workmen's  Compensation  Policy       .      .  405 
XXIV.  Sample  Classification  Sheet  of  Compensation  Manual  .      .      .408 

XXV.  Sample  Rate  Sheets  of  Compensation  Manual 409 

XXVL  Sample  Page  of  Compensation  Schedule  Rate 410 

XXVII.  Financial  Statement  of  a  Compensation  Mutual       ....   412 
XXVIII.  Statement  of  a  State  Workmen's  Compensation  Fund  .      .      .  412 

XXIX.  Plan  of  the  Philadelphia  Contributionship 413 

XXX.  New  York  Standard  Fire  Policy 414 

XXXL  Co-Insurance    Clause 417 

XXXII.  Mortgagee    Clause 417 

XXXIII.  Mortgagee   Clause  with  Full   Contribution 418 

XXXIV.  Excess    Floater 418 

XXXV.  Household    Form 419 

XXXVI.  Lightning  Clause 419 

xiii 


xiv     INSURANCE  PRINCIPLES  AND  PRACTICES 

PAGE 

XXXVII.  Loss  Payable  Clause 420 

XXXVIII,  Permit    to    Use    Dangerous    Article     (Gasoline,    Benzine    or 

Naphtha) 420 

XXXIX.  Sprinkler  Leakage   Clause 420 

XL.  Use  and  Occupancy  Clause 421 

XLI.  Fire   Insurance   Binder 423 

XLII.  Cancellation   Notice 423 

XLIII.  Renewal    Receipt 424 

XLIV.  Short  Rate  Table        424 

XLV.  Agreement  to  Appraise 425 

XLVI.  Proof  of  Loss    (Fire) 427 

XLVII.  Daily  Report 429 

XLVIII.  Monthly   Report 430 

XLIX.  Agent's   Contract    (Fire) 431 

L.  Maps  of  Fire  Underwriters'  Associations 432 

LI.  Universal    Mercantile    Schedule      ....       Facing   page  432 

LII.  Basis  Table,  Dean  Schedule 433 

LIII.  Contents  Table,  Dean  Schedule 433 

LIV.  Occupancy  Table,  Dean  Schedule 433 

LV.  Calculation  of  Building  Rate,  Dean  Schedule 434 

LVI.  Calculation  of  Building  and   Contents,  Rate,  Dean   Schedule  434 

LVII.  Riot  and  Civil  Commotion  Policy 436 

LVIII.  Application   of  Reciprocal 438 

LIX.  Policy   of  Reciprocal         439 

LX.  Statement   of   a   Lloyds   Association 443 

LXI.  Marine   Insurance  Binder 447 

LXII.  Marine  Cargo  Policy 448 

LXIII.  Hull  Marine  Policy 452 

LXIV.  Marine  Protection  and  Indemnity  Clause 457 

LXV.  Marine  W^ar  Risk  Clause 458 

LXVI.  Alien   Enemy   Warranty    (Marine) 458 

LXVII.  Embargo   Warranty    (Marine)        458 

LXVIII.  Warranty  Against    Capture    (Marine) 458 

LXIX.  Explosion    Clause    (Marine) 458 

LXX.  Deviation    Clause     (Marine) 459 

LXXI.  Warranty  of   Use    (Marine) 459 

LXXII.  Average  Clause    (Marine) 459 

LXXIIL  Extension    of    Coverage    (Marine) 459 

LXXIV.  F.  P.  A.  Clause   (Marine) 459 

LXXV.  Extended  Coverage    (Marine) 459 

LXXVL  Warranty  of  Safety    (Marine) 460 

LXXVII.  Warranty  of   Neutrality    (Marine) 460 

LXXVIII.  Warranty  Not  to  Abandon    (Marine) .460 

LXXIX.  Reduction   of  Policy    (Marine) 460 

LXXX.  Sailing  Warranty    (Marine) 460 

LXXXI.  P.  P.  I.  Clause   (Marine) 460 


INDEX  TO  APPENDICES  xv 

PAGE 

LXXXII.  Inception  of  Risk  Clause    (Marine) 460 

LXXXIII.  F.  P.  A.  Clause    (Marine) 461 

LXXXIV.  Loading    Warranty    (Marine)         461 

LXXXV.  Return   of   Premium    (Marine)        461 

LXXXVI.  Goods  in   Enemy  Territory    (Marine) 461 

LXXXVII.  Lighterage  Clause    (Marine) 461 

LXXXVin.  Machinery  Clause    (Marine) 461 

LXXXIX.  Latent   Defect   Clause    (Marine) 462 

XC.  Cancellation    Clause    (Marine) 462 

XCL  Valuation    Clause    (Marine) 462 

XCII.  Loading  Warranty    (Marine) 462 

XCIIL  F.  P.  A.  A.  C.  Clause   (Marine) 462 

XCIV.  Warranty  Against   Capture    (Marine) 462 

XCV.  F.  P.  A.  E.   C.    (Marine) 463 

XCVL  Sailing  Warranty    (Marine) 463 

XCVIL  Leakage   Clause    (Marine) 463 

XCVIIL  F.   P.   A.    Clause .  463 

XCIX.  Riot  and  Civil  Commotion  Clause    (Marine) 463 

C.  Subrogation    Warranty    (Marine) 463 

CL  Statement  of  a  Marine  Insurance  Mutual 464 

CII.  Automobile  Liability    Policy 467 

CIII.  Automobile  Certificate   of  Insurance 469 

CIV.  Automobile  Collision   Endorsement 470 

CV.  Automobile  Property  Damage  Endorsement 471 

CVI.  Automobile  Fire,  Theft,  and  Transportation  Policy     .      .      .  472 

CVII.  Automobile  Valued  Policy  Endorsement 47S 

CVIII.  Automobile  Lock   Warranty  Endorsement 475 

ex.  Sample  Page  of  Automobile  Liability,  Property  Damage,  and 

Collision  Rates         48g 

Rates        486 

CXI.  Sample  Page  of  Automobile  Fire  and  Theft  Rates       .      .  487 

CXII.  Sample  Automobile  Classification  Sheet 488 

CXIII.  Credit  Insurance   Policy 489 

CXIV.  Credit  Insurance  Policy        493 

CXV.  Surety  Bond   (Individual) 496 

CXVL  Surety  Bond   (Schedule)        499 

CXVII.  Contractor's   Bond 502 


Part  I 
INSURANCE  IN  GENERAL 


Chapter  I 

THE  USES  OF  INSURANCE 

Insurance  as  a  factor  in  business. — The  value  of  insurance 
Is  usually  much  underestimated.  This  is  partly  the  result  of 
adopting  a  very  narrow  vIcav  of  the  insurance  business  for,  In 
appraising  the  value  of  any  business  enterprise,  we  must  consider 
not  only  the  plain  and  apparent  benefits  which  result  from  Its 
activities  but  also  its  more  remote  consequences.  Upon  care- 
ful analysis  it  will  be  seen  ( 1 )  that  insurance  performs  a  large 
number  of  functions  for  the  business  man  and  the  community 
which  are  usually  accepted  without  notice  or  appreciation  and 
(2)  that  the  numerous  forms  of  insurance  have  in  sub- 
stance very  much  the  same  objects  in  view.  To  illustrate  the 
significance  of  these  two  facts  and  to  show  the  important  part 
played  by  modern  insurance  in  business  enterprise  are  the  prin- 
cipal objects  of  this  chapter.  For  convenience  the  various 
services  of  insurance  have  been  grouped  as  far  as  possible  and 
are  described  under  ten  headings. 

1.  Insurance  introduces  security  in  business  undertakings. 
— A  service  which  is  common  to  all  forms  of  Insurance, — life 
insurance,  property  insurance,  credit  Insurance,  bonding, 
title  insurance,  etc., — Is  to  substitute  for  large  and  uncer- 
tain losses  a  small  but  certain  payment.  By  this  we  mean  that 
the  business  man  enters  into  a  contract  to  pay  a  relatively  small 
premium  at  fixed  intervals,  in  exchange  for  which  the  insurance 
company  agrees  to  assume  the  risk  of  certain  large  losses  which 
may  or  may  not  occur.  For  example,  while  an  individual  knows 
that  fires  are  constantly  destroying  business  properties  and 
stocks  of  goods  he  cannot  tell  how  soon  his  property  will  be 
thus  visited,  if  ever.  If  he  could  foresee  his  fire  losses  with  any 
accuracy  he  could  make  provision  beforehand  without  the  as- 
sistance of  insurance,  provided  there  were  sufficient  time;  but 
since  the  event  and  its  results  are  uncertain  he  has  no  assurance 
that  his  most  earnest  efforts  to  provide  for  the  future  may 
not  be  cut  short  by  an  untimely  catastrophe.  But  what  Is 
most  uncertain  with  regard  to  an  individual  may  be  closely  cal- 

3 


4     INSURANCE  PRINCIPLES  AND  PRACTICES 

culated  for  a  group.  A  study  of  fire  insurance  statistics  would 
show  that  on  bakeries,  for  example,  a  certain  percentage  of  loss 
through  fire  might  be  expected  in  a  given  period.  If  such 
statistics  were  more  satisfactory  in  character  it  would  be  pos- 
sible even  to  find  the  statistical  results  with  regard  to  particular 
kinds  of  bakeries  in  particular  buildings.  How  this  might  be 
accomplished  is  shown  in  the  chapter  on  fire  insurance  rates. 
It  is  therefore  possible  to  make  provision  on  a  mathematical 
basis  for  a  group  which  is  not  possible  for  an  individual.  The 
element  of  certainty  or  assurance  is  a  vital  one  in  every  business 
and  to  every  Individual,  and  insurance  provides  a  way  in  which 
such  certainty  can  be  introduced  where  it  did  notpreviously  exist. 

Nor  do  other  forms  of  insurance  differ  from  fire  insurance 
in  this  respect,  except  in  degree.  Any  person  who  is  familiar 
with  the  record  of  the  past  experience  of  life  insurance  com- 
panies can  tell  with  the  greatest  ease  that  out  of  100,000  per- 
sons at  age  twenty,  3,891  will  die  before  they  reach  twenty-five. 
Nevertheless  with  regard  to  an  Individual  we  can  predict 
nothing,  and  one  who  attempts  to  provide  against  death  by 
saving  may  or  may  not  be  successful.  In  marine  insurance  we 
also  find  persons  and  companies  who,  relying  upon  their  know- 
ledge of  conditions  and  the  experience  of  the  past,  are  willing 
for  a  small  consideration  to  assume  the  risks  incident  to  sending 
a  vessel  or  a  cargo  across  the  sea.  It  is  true  that  here  the  con- 
ditions affecting  the  risk  are  so  many  and  so  varied  that  the 
problem  of  calculating  a  correct  premium  is  more  complicated, 
but  the  principle  Involved  Is  the  same. 

Similar  illustrations  are  found  In  every  field  of  insurance.  No 
property  owner  is  absolutely  sure  that  his  title  is  good  and  no 
one  would  be  willing  to  make  a  single  prediction  about  It  Inas- 
much as  his  judgment,  however  good,  might  be  wrong.  But 
given  a  sufficiently  large  group  of  risks  underwriters  are 
willing  to  transform  doubt  into  certainty  by  granting  Indemnity 
in  return  for  a  stipulated  premium.  No  merchant  knows  when 
a  given  debtor's  account  may  have  to  be  written  off  as  a  "bad 
debt,"  nor  how  much  he  may  lose  on  an  individual  debtor,  but 
In  many  lines  of  business  the  average  loss  through  bad  debts  Is 
almost  absolutely  sure.  When  a  combination  of  risks  thus  In- 
creases the  certainty  of  the  future  it  becomes  possible  for  the 
manufacturer  to  remove  his  doubts  by  the  purchase  of  a  credit 
Insurance  policy.  The  law  of  most  States  makes  a  business 
responsible    for   compensation   to    Injured    employees,    usually 


THE  USES  OF  INSURANCE  5 

specifying  exactly  the  amount  to  which  the  individual  employee 
is  entitled;  but  even  in  the  largest  plants  it  is  difficult  to  esti- 
mate the  total  amount  which  will  have  to  be  paid  out  in  any 
given  year.  But  by  combining,  for  instance,  all  steel  plants  in 
the  country  we  can  arrive  at  a  much  more  exact  conclusion,  and 
through  compensation  insurance  can  remove  this  element  of 
chance  from  the  employer's  business.  Probably  most  business 
men  would  admit  that  nothing  is  more  uncertain  than  the  law, 
and  yet  they  assume  a  legal  liability  when  they  permit  a  sales- 
man to  enter  their  premises,  when  they  hang  a  sign  over  the 
sidewalk,  operate  a  factory  with  windows  opening  on  the 
street,  and  perform  many  other  acts  without  a  thought  of  the 
element  of  risk  thereby  introduced.  A  public  liability  policy 
would  make  many  of  these  uncertainties  certainties. 

So  we  might  go  on  to  illustrate  the  element  of  uncertainty 
in  the  operation  of  an  automobile,  in  an  operation  performed  by 
a  physician,  in  the  operation  of  an  elevator,  in  the  existence  of 
a  plate  glass  window,  the  operation  of  a  steam  boiler  and  the 
sending  of  a  package  by  parcel  post,  in  all  of  which  the  uncer- 
tainty, or  at  least  a  considerable  part  thereof,  may  be  eliminated 
by  the  use  of  insurance.  It  is  the  failure  fully  to  appreciate 
this  principle  that  causes  men  so  often  to  insure  their  property 
but  to  neglect  their  life  insurance,  to  inform  themselves  of  their 
liability  under  compensation  acts,  yet  ignore  their  liability  to  the 
public.  Enough  has  been  said,  however,  to  illustrate  the  possi- 
bilities In  the  removal  of  risk  made  available  to  the  individual 
and  the  business  man.  If  all  uncertainty  could  be  removed 
from  business,  profits  would  be  sure;  insurance  removes  many 
uncertainties  and  to  that  extent  Is  profitable. 

2.  Insurance  increases  business  efficiency. — The  natural 
result  of  the  elimination  of  risk  and  uncertainty  is  an  increase 
in  business  efficiency.  Every  manufacturer  knows  that  If  it 
were  possible  for  him  to  reduce  the  uncertainties  of  his  busi- 
ness by  one-half  his  efficiency  as  a  business  unit  would  be  at 
least  trebled.  The  price  of  goods  is  often  regarded  as  an  in- 
dex to  the  efficiency  of  their  production  and  distribution,  and 
it  Is  well  known  that  the  smaller  the  risk  involved,  the  lower 
the  price  It  is  possible  to  charge.  The  most  uncertain  busi- 
nesses are  in  the  main  the  most  inefficient  ones;  for  the  exis- 
tence of  the  large  element  of  doubt  minimizes  the  importance 
of  the  many  small  factors  which  go  to  make  up  the  sum  total 
of  efficiency.    With  a  few  great  risks  out  of  the  way  the  busi- 


6     INSURANCE  PRINCIPLES  AND  PRACTICES 

ness  man  Is  free  to  devote  his  attention  to  those  smaller  per- 
fections which  give  him  an  advantage  over  his  competitors. 

Suppose,  for  example,  that  a  young  man  has  accumulated  a 
small  capital  and  is  offered  an  opportunity  to  invest  this  sum 
in  an  exporting  business.  He  may  be  very  confident  of  the 
success  of  this  business  and  would  be  willing  to  risk  his 
future  in  it  without  reserve.  But  he  reflects  upon  the  hazards 
incidental  to  ocean  transportation  and  the  dangers  of  fire  and 
dishonesty.  His  investment  represents  an  accumulation  ac- 
quired by  saving  and  hard  labor,  and  when  he  considers  the 
chances  of  fire,  of  shipwreck,  of  damage  to  the  goods  by  water, 
etc.,  he  becomes  unwilling  to  take  the  risk  unless  insurance  is 
Introduced  as  a  means  of  protection.  With  this  assurance  he 
Is  an  efficient  business  man,  without  it  he  is  a  gambler  harassed 
by  doubt  and  hesitation. 

Merchants  would  be  unwilling  to  trust  their  goods  upon  the 
ocean  if  they  were  not  protected  by  marine  Insurance  and 
would  be  content  to  let  foreign  trade  take  care  of  Itself,  prefer- 
ing  to  avoid  the  risks  Incidental  to  water  transportation. 
Without  Insurance  many  employers  would  be  afraid  to  entrust 
large  sums  of  money  and  Important  duties  to  subordinates, 
and  would  be  forced  to  give  their  own  valuable  time  and  at- 
tention to  these  affairs;  but  when  protected  by  a  bonding  com- 
pany's policy  they  know  that  most  of  the  risk  has  been  re- 
moved. Without  some  form  of  compensation  insurance  a 
small  business  would  constantly  worry  along  under  the  danger 
of  being  rendered  Insolvent  by  the  claim  of  an  injured  work- 
man.    In  many  States  this  form  of  Insurance  is  compulsory. 

As  further  Illustrations,  let  us  take  the  case  of  a  partnership, 
and  the  relations  between  employer  and  employee.  It  may 
seem  a  strange  statement  but  It  is  nevertheless  true,  that  life 
Insurance  has  made  the  partnership  a  more  attractive  form  of 
business  enterprise.  This  Is  so  because  a  partner  may  die  and 
his  heirs  be  disinclined  to  continue  the  business,  asking  Instead 
for  a  division  of  the  assets.  Under  such  circumstances  It  is 
doubtful  whether  the  remaining  partners  would  be  In  a  position 
to  pay  promptly  the  large  sum  necessary  to  purchase  the  In- 
terest of  the  deceased  partner,  and  yet  without  this  resource 
the  heirs  may  make  considerable  trouble  for  the  business.  A 
life  insurance  policy  with  the  proceeds  payable  to  the  business 
upon  the  death  of  the  partner  provides  funds  which  are  Im- 
mediately available   to  satisfy  his  heirs.     The   partners  may 


THE  USES  OF  INSURANCE  7 

thereby  eliminate  this  worry  from  the  large  number  of  dis- 
quieting possibilities  which  they  have  to  face. 

In  recent  years  business  men  have  attempted  to  stabilize 
relations  with  employees  by  furnishing  them  with  insurance, 
the  employer  paying  all  or  a  portion  of  the  premium  and  thus 
making  the  employee  feel  that  the  concern  is  vitally  interested 
in  his  welfare.  That  far-sighted  business  men  have  realized 
the  value  of  this  relief  is  evident  from  the  purchase  of  group 
insurance  policies  involving  millions  of  dollars  of  insurance,  as 
illustrated  by  the  Arlington  Mills  policy  for  eight  million  dol« 
lars,  the  policy  of  the  Mid-West  Refining  Company  for  two 
million  dollars,  and  policies  of  approximately  one  million  dol- 
lars in  the  Westinghouse  Companies,  the  Acadia  Mills,  the 
Monomac  Spinning  Company,  the  Trans-Continental  Oil  Com- 
pany and  many  other  important  concerns. 

In  extending  credit  to  customers  every  merchant  hopes  and 
expects  that  the  buyer  will  pay  in  full;  he  depends  upon  his 
credit  department  to  eliminate  all  the  bad  risks.  Let  us  go  a 
step  further  and  assume  that,  since  past  experience  shows  him 
that  a  certain  relatively  small  loss  from  this  cause  is  normally 
to  be  expected,  he  adds  something  to  the  price  of  his  goods  to 
cover  it.  There  still  remains  the  uncertainty  as  to  whether  such 
addition  is  sufficient.  The  failure  of  a  single  large  customer 
may  transform  the  year's  operations  from  success  to  failure, 
or  unusual  business  conditions  may  increase  the  loss  to  unex- 
pected size.  But  by  means  of  a  credit  insurance  policy  he  can 
go  still  further  and  eliminate  most  of  this  remaining  risk, 
thereby  Increasing  the  efficiency  of  his  credit  department. 

We  find,  therefore,  that  all  forms  of  insurance  possess  In 
common  the  attribute  of  improving  efficiency  in  business  by 
removing  doubt,  worry  and  hesitation;  an  attribute  which  is 
manifested  by  the  emancipation  of  the  business  man  from  fear 
of  possible  loss,  the  encouragement  to  enter  into  business  pro- 
motions, the  insurance  of  fidelity  of  employees,  removal  of  a 
dangerous  element  in  partnerships,  stabilization  of  relations 
with  employees  and  the  diminution  of  losses  through  bad  debts. 

3.  Insurance  tends  toward  the  equitable  assessment  of 
cost. — Another  advantage  of  Insurance  as  conducted  by  modern 
methods  Is  the  correct  distribution  of  costs.  Owing  to  the  fact 
that  Insurance  is  based  upon  large  numbers  of  risks  it  has  be- 
come practically  a  necessity  to  have  a  large  and  well  organized 
system  for  determining  premium  rates.     It  is  essential  to  the 


8     INSURANCE  PRINCIPLES  AND  PRACTICES 

success  of  the  insurance  business  that  costs  be  assessed  equit- 
ably among  policy-holders.  In  life  insurance  it  is  necessary  to 
employ  the  services  of  expert  actuaries  and  mathematicians, 
not  only  to  arrive  at  premium  rates,  but  to  calculate  surrender 
values,  reserves,  policy  loans,  methods  of  converting  policies, 
and  to  solve  many  other  problems.  In  fire  insurance,  a  vast 
number  of  factors  have  to  be  judged  in  arriving  at  the  rate 
on  a  risk.  As  expressed  by  one  writer:  "He  who  assumes  the 
risk  of  a  flour  mill,  for  example,  should  know  more  of  its  dan- 
gers than  the  miller  himself  *  *  *  Drawing  a  greater 
number  of  contracts  in  a  year  than  do  many  lawyers  in  a  life- 
time, and  standing  often  face  to  face  with  the  most  perplexing 
questions  of  jurisprudence,  it  may  be  questioned  if  he  should 
know  less  than  does  the  attorney  who  has  made  it  his  profes- 
sion. Seriously  affected  by  every  discovery  of  the  chemist,  and 
liable,  at  any  moment,  to  have  his  chances  of  loss  on  whole 
classes  of  risks  alarmingly  increased,  by  new  chemical  combina- 
tions which  follow  each  other  as  rapidly  as  the  changes  of  a 
kaleidoscope,  he  should  know  not  less  of  them  all  than  does  the 
chemist  himself.  In  short,  there  is  scarcely  a  science,  art,  or 
manufacture  with  which  he  should  not  be  more  or  less 
familiar,  and  if  the  successful  conduct  of  any  one  business  or 
calling  requires  a  life-time  of  study  and  application,  how  much 
more  should  the  business  of  insurance — which  demands  a 
knowledge  more  or  less  intimate  of  every  other — require 
lifelong  study  and  the  closest  and  most  constant  observation."  ^ 
In  marine  insurance,  the  problem  becomes  even  more  difficult, 
due  to  the  multiplicity  of  considerations  to  be  taken  into  ac- 
count; and  the  involved  procedure  developed  in  the  making  of 
compensation  insurance  rates  would  be  a  puzzle  to  many  a 
mathematician.  Naturally  such  work  can  best  be  performed 
by  persons  who  make  this  their  business,  and  only  by  an  organ- 
ized system  of  insurance  is  a  group  of  persons  developed  who 
specialize  in  this  essential  work.  Indeed  the  theory  and  prac- 
tice of  insurance  have  been  so  extensively  and  intensively  de- 
veloped within  recent  years  that  no  person  can  be  thoroughly 
familiar  with  all  phases  of  all  branches  of  the  business. 

4.  Insurance  serves  as  a  basis  of  credit. — Credit  extension 
is  a  most  important  service  in  modern  business  life  and  is  con- 
tributed to  by  practically  all  forms  of  insurance.     The  simplest 

*F.  C.  Moore,  "Fire  Insurance  and  How  to  Build,"  New  York,  1903,  pp.  22 
and  23. 


THE  USES  OF  INSURANCE  9 

Illustration  of  the  necessity  of  Insurance  Is  the  example  of  a 
mortgage  upon  real  estate.  No  mortgagee  Is  willing  to  lend 
his  money  with  property  as  security  unless  he  knows  that  such 
property  Is  protected  from  destruction  by  fire.  No  dealer  cares 
to  sell  goods  to  a  retailer  on  credit  unless  he  has  some  assurance 
that  the  goods  and  the  business  of  the  retailer  are  protected 
from  sudden  disaster  by  fire.  It  Is  well  known  that  the  bulk  of 
international  financial  transactions  depend  upon  three  docu- 
ments, a  draft,  a  bill  of  lading  and  a  marine  insurance  certifi- 
cate; and  the  last  is  not  the  least  important  of  these.  The  bill 
of  lading  gives  security  to  the  draft  and  the  marine  Insurance 
certificate  gives  security  to  the  bill  of  lading.  Business  men 
are  unable  to  obtain  loans  at  the  bank  if  their  property  is  not 
protected  against  loss  by  fire  and  a  grain  dealer  can  not  use 
his  warehouse  receipts  as  collateral  for  a  loan  unless  the  grain 
is  protected  against  a  similar  risk. 

While  the  part  played  by  fire  and  marine  insurance  in  the 
extension  of  credit  Is  quite  generally  recognized,  there  are  few 
who  realize  that  logically  other  forms  of  insurance  should  oc- 
cupy a  similar  position  and  be  viewed  by  creditors  as  equally 
necessary.  A  bank  in  making  a  loan  to  a  business  Investigates 
its  assets  but  sometimes  overlooks  the  greatest  of  all, — the  life 
of  the  leading  spirit  in  that  business.  His  life  may  be  of  more 
Importance  to  the  success  of  that  business  than  the  final  value 
of  any  other  asset.  Why,  therefore,  should  not  life  Insurance 
be  considered  as  necessary  to  the  extension  of  credit  as  fire 
insurance?  Life  Insurance  also  serves  Its  purpose  in  the  pur- 
chase of  a  home  on  credit.  If  the  wage  earner  of  the  family 
lives  to  pay  the  installments  upon  the  purchase  price,  every- 
thing may  finally  work  out  satisfactorily;  but  what  will  be 
the  situation  if  his  death  occurs  before  the  obligation  is  dis- 
charged and  his  dependents  are  left  to  shoulder  the  burden 
of  the  remaining  payments?  They  should  be  protected 
against  this  contingency  by  the  existence  of  a  life  insurance 
policy  to  the  extent  of  the  debt,  at  least.  One  class  of  assets 
of  a  business  is  the  accounts  owing  to  it  by  other  concerns. 
But  we  know  that  such  accounts  are  of  varying  value,  depend- 
ing not  only  upon  the  character  of  the  debtors  but  upon  future 
business  conditions.  Before  these  debts  are  taken  at  their  face 
value  it  is  logical  that  they  be  guaranteed  In  some  manner,  as 
for  instance  being  covered  by  a  credit  insurance  policy.  The 
possibility   of  the   ruin   of   a   business   by   the   dishonesty   o£ 


10   INSURANCE  PRINCIPLES  AND  PRACTICES 

trusted  employees  is  worth  consideration  In  passing  upon  It  as 
a  credit  risk  and  It  would  seem  discreet  to  require  that  the 
creditor  be  protected  against  this  possibility  by  the  existence  of 
a  bonding  company's  policy,  which  will  minimize  the  possi- 
bility of  such  dishonesty  and  reimburse  for  any  loss  that  may 
occur. 

These  forms  of  insurance,  therefore,  increase  the  credit 
standing  of  the  business  In  question.  If  we  agree  that  life  in- 
surance for  an  important  person  in  the  business  is  as  essential 
as  fire  insurance  on  its  property,  why  should  not  the  health  of 
the  same  individual  be  required  to  be  Insured,  on  the  ground 
that  it  also  is  an  essential  part  of  the  credit  rating  of  the 
business  ? 

The  above  Illustrations  are  sufficient  to  show  that  a  very 
narrow  view  has  usually  been  taken  of  the  value  of  insurance 
as  a  factor  in  the  extension  of  credit;  that  in  fact  there  is  no 
good  reason  for  not  considering  every  form  of  Insurance  car- 
ried by  a  business  concern  or  an  individual  as  a  part  of  credit 
■rating.  How  illogical  it  is  to  consider  an  automobile  as  a  busi- 
ness asset,  when  under  certain  conditions  Its  risks  outweigh 
its  benefits,  and  yet  refuse  to  recognize  a  compensation  insur- 
ance policy,  a  burglary  policy,  a  surety  bond  or  an  accident 
and  health  policy,  all  of  which  under  all  conditions  protect 
against  risks  instead  of  creating  them. 

5.  The  capitalization  of  earning  power. — We  are  all 
familiar  with  this  idea  in  corporation  finance.  We  consider 
the  worth  of  a  corporation  as  being  its  value  as  a  going  con- 
cern, and  we  estimate  the  intangible  asset  called  good-will  by 
separating  its  earnings  from  the  earnings  of  tangible  assets. 
We  speak  of  the  security  market  being  a  market  for  Incomes, 
meaning  that  persons  are  willing  to  pay  for  a  security  their  es- 
timate of  its  present  and  future  earning  power.  Many  persons 
have  applied  this  idea  to  personal  finance  also  with  the  assis- 
tance of  some  form  of  insurance  policy. 

Let  us  assume  that  a  machine  produces  a  net  income  of 
$2,000  after  the  money  necessary  for  Its  up-keep  and  allow- 
ance for  interest  have  been  deducted,  and  that  the  average  life- 
time of  this  machine  Is  twenty-five  years.  It  Is  easy  to  compute 
that  Its  capital  value  under  these  circumstances  Is  approxi- 
mately $50,000,  and  that  if  It  were  lost  this  would  measure 
approximately  the  detriment  to  the  business  owning  it.  By 
a  similar  method  It  is  easy  to  calculate  the  monetary  value  of 


THE  USES  OF  INSURANCE  11 

the  life  of  a  bread-winner  to  his  family.  Why  should  not  the 
earning  power  of  a  human  life  be  represented  by  an  insurance 
policy  to  its  capitalized  value,  a  policy  which  wiir reimburse 
his  dependents  for  the  loss  of  that  earning  power?  Let  us 
further  assume  that  a  machine  such  as  described  above  must  be 
repaired  when  damaged  and  that  under  these  conditions,  in- 
stead of  bringing  in  a  net  income  of  $2,000  it  costs  the  business 
$2,000  to  restore  it.  The  human  machine  is  similar  to  this, 
when  viewed  in  relation  to  his  family  which  must  support  him 
when  he  is  ill  or  crippled.  Not  only  does  he  then  lose  his  earn- 
ing power  but  he  becomes  an  expense  to  his  family;  and  if  to- 
tally disabled  he  is  in  a  condition  which  has  been  described  as  "a 
living  death."  His  family  should  be  protected  against  the 
possibility  of  the  human  asset  becoming  a  liability  by  accident 
and  health  insurance  and  by  a  total  disability  clause  on  the  life 
insurance  policy. 

The  position  of  a  business  firm  in  relation  to  a  valuable  em- 
ployee is  very  much  the  same  as  the  position  of  the  family  with 
respect  to  its  principal  support.  The  principle  illustrated  by 
the  above  paragraphs  has  been  more  and  more  recognized  in 
recent  years  by  progressive  business  men.  There  is,  for  in- 
stance, a  policy  of  two  million  dollars  issued  on  the  life  of  the 
president  of  the  FIsk  Rubber  Company  and  vice-president  of 
the  Willys-Overland  Company,  a  large  part  of  which  Is  for 
the  protection  of  the  business.  This  is  one  of  the  more  un- 
usual cases,  but  hundreds  of  ordinary  illustrations  might  be 
cited  of  policies  of  from  $100,000  to  $500,000  used  for  this 
purpose. 

In  the  same  sense  the  book  accounts  of  a  business  may  be 
regarded  as  assets  from  which  a  certain  earning  power  is  ex- 
pected. Every  loss  from  bad  debts  diminishes  the  net  earnings 
of  these  book  accounts  and  against  the  insolvency  of  debtors 
there  is  only  one  sure  remedy, — the  existence  of  a  credit  in- 
surance policy.  Part  of  the  value  of  the  title  to  a  piece  of  real 
estate  lies  In  its  marketability,  and  this  in  turn  Is  dependent 
upon  the  soundness  of  the  title.  The  marketability  of  titles  is 
today  practically  universally  protected  by  title  Insurance  poli- 
cies. The  same  Idea  is  applicable  to  any  form  of  property. 
A  fire  Insurance  premium  might  be  considered  as  capitalizing 
the  value  of  a  building,  a  plate-glass  policy  as  capitalizing  the 
value  of  a  window,  use  and  occupancy  protection  as  capitalizing 
the  value  of  a  "going"  business,  a  marine  policy  as  capitalizing 


12   INSURANCE  PRINCIPLES  AND  PRACTICES 

the  value  of  a  cargo  shipment.  In  each  of  these  cases,  of  course, 
this  statement  is  true  only  to  the  extent  to  which  the  particular 
policy  protects,  but  if  a  policy  covering  all  possible  contin- 
gencies were  issued  on  property  the  idea  would  be  true  in 
every  respect. 

6.  Insurance  makes  saving  possible. — Insurance  must  be 
regarded  as  a  hedge — a  word  familiar  alike  in  the  sporting  and 
commercial  world.  If  a  person  who  has  entered  into  a  con- 
tract for  the  future  delivery  of  wheat  protects  himself  by  con- 
tracting with  another  for  the  future  delivery  of  the  same  article 
he  is  said  to  have  "hedged,"  because  whatever  he  may  lose  on 
the  first  contract,  he  makes  on  the  second.  In  a  similar  fashion, 
life  insurance  may  be  used  as  a  hedge  against  the  risks  of  sav- 
ing. Many  men  decide  to  obtain  protection  by  the  practice  of 
saving  regardless  of  the  fact  that  death  may  not  give  them 
time  to  accomplish  their  object.  The  following  illustration 
will  make  this  clear.  Suppose  of  two  thousand  healthy  men, 
each  twenty-five  years  of  age,  and  married,  one  thousand  de- 
cide to  save  money  and  protect  their  wives  by  placing  $100 
in  the  bank  at  interest  each  year,  and  the  other  one  thousand  de- 
cide to  invest  an  equal  amount  annually  in  life  insurance.  The 
following  table  shows  the  results :  ^ 

Savings  Group:  Insured  Group: 

End  of  No.  of        Amt.  received  No.  of        Amt.  received 

Widows  by   each  Widoivs  by  each 

1st  year 8  $104  8  $5,000 

Sth  year 40  104 —  564  40  5,000 

10th  year 80  104 — 1249  80  5,000 

20th  year 174  104 — 3096  174  5,000 

28th  year 238  104—5197  238  5,000 

It  is  apparent  that,  even  though  after  the  27th  year  some 
financial  advantage  accrues  from  the  savings  plan,  such  advan- 
tage goes  only  to  those  who  ( 1 )  are  fortunate  enough  to  live 
that  long  and  (2)  are  possessed  of  suflScIent  will-power  to  con- 
tinue saving  unassisted. 

Some  business  firms  decide  to  carry  their  own  Insurance  risk 
by  the  practice  of  self-insurance,  which  involves  setting  aside 
a  certain  sum  each  year  in  a  fund  to  pay  any  losses  Incurred. 
The  great  and  obvious  risk  involved  here  is  no  different  in  any 
essential  respect  from  the  risk  run  by  the  one  thousand  men 
who  used  the  savings  fund  as  protection.     If  a  fire  or  a  large 

'These  results  are  excluding  any  possible  dividends  received. 


THE  USES  OF  INSURANCE  13 

compensation  payment  or  a  disastrous  damage  suit  comes  too 
soon,  it  may  find  the  self-insurance  fund  with  insufficient  ac- 
cumulation to  meet  the  consequences.  Against  such  a  contin- 
gency insurance  provides  an  Intelligent  and  common-sense 
hedge.  Instead  of  immediately  assuming  all  the  risk  of  self- 
Insurance  It  would  be  wiser  for  many  business  men  to  assume 
this  risk  gradually,  combining  one-tenth  self-insurance  with 
nine-tenths  insurance  the  first  year,  one-fifth  self-insurance  with 
four-fifths  insurance  the  second  year,  and  so  on  until  the  ob- 
ject they  have  in  mind  is  fully  attained.  Thus  in  a  sense 
insurance  may  be  regarded  as  prerequisite  or  essential  to  sav- 
ing, in  order  to  guard  against  uncertain  results  of  the  latter. 

7.  Insurance  as  an  investment. — Some  forms  of  Insurance 
combine  with  the  insurance  feature  an  Investment  element. 
This  Is  only  incidental  to  the  protection  element  and  yet  serves 
a  useful  purpose.  In  life  Insurance  particularly.  Its  Importance 
has  been  emphasized.  Under  the  level-premium  plan,  a  man 
pays  in  the  early  years  of  the  policy  a  premium  more  than 
sufficient  to  carry  the  risk  and  this  saving  goes  to  make  up  for 
the  deficiency  In  the  annual  premium  In  the  latter  years  of  the 
policy  when  the  mortality  rate  has  greatly  increased.  The 
extra  amounts  collected  In  the  early  years  are  therefore  In  the 
nature  of  savings  which  earn  interest.  This  saving  element 
exists  In  some  term  policies,  in  all  ordinary-life  policies  to  some 
extent,  to  a  greater  extent  in  the  limited-payment  and  is  ex- 
tended still  further  in  the  endowment  policy,  which  purposely 
combines  life  Insurance  and  saving.  The  sums  so  accumulated 
by  the  Insurance  company  earn  Interest  and  experience  has 
shown  that  insurance  companies  have  earned  a  fairly  large  rate 
of  Interest  for  the  remarkable  safety  of  the  Investment.  In 
the  past  twenty-five  years  It  Is  said  that  no  policy-holder  has 
lost  any  of  the  savings  he  had  in  any  large  and  well-established 
legal  reserve  life  Insurance  company. 

In  other  forms  of  Insurance  the  saving  feature  Is  less  promi- 
nent. By  straining  the  analogy  somewhat  we  may  consider 
that  the  amounts  put  into  a  self-insurance  fund  or  paid  out  as 
premiums  are  put  aside  into  a  fund  for  a  "rainy  day" — to  take 
care  of  losses  which  are  sure  to  occur  to  the  group  as  a  whole, 
although  each  individual  member  of  the  group  hopes  that  he 
will  not  be  the  victim.^ 

'  See    also   the   fire   insurance   plan   of   the    "Philadelphia    Contributionship," 
Appendix  XXIX. 


14  INSURANCE  PRINCIPLES  AND  PRACTICES 

Insurance  companies  have  further  developed  this  idea  of 
thrift  by  making  it  applicable  to  the  proceeds  of  policies.  In 
order  to  prevent  beneficiaries  from  squandering  the  proceeds  of 
a  life  insurance  policy,  income  policies  have  been  invented, 
which  provide  for  the  payment  of  the  proceeds  in  instalments. 
Likewise,  the  proceeds  of  the  policy  may  be  left  with  the  com- 
pany for  safe  keeping,  earning  meanwhile  a  reasonable  rate  of 
interest.  Some  companies  have  sold  "gold  bond"  policies, 
the  proceeds  of  the. policy  being  a  bond  with  fixed  interest  pe- 
riods instead  of  cash.  It  should  also  be  noted  that  the  saving 
element  in  a  life  insurance  policy  has  been  made  little  different 
from  the  saving  plan  of  a  bank,  inasmuch  as  the  policy-holder 
may  borrow  at  any  time  from  the  savings  fund  he  has  accumu- 
lated or  may  withdraw  it  entirely  In  the  form  of  a_suri£nder 
value. 

8.  Insurance  promotes  thrift. — In  the  illustration  of  the 
two  thousand  men,  one  thousand  of  whom  made  use  of  insur- 
ance, it  was  assumed  that  all  of  those  who  adopted  the  savings 
method  possessed  the  determination  to  adhere  to  their  plan 
and  that  none  failed  to  put  away  $100  faithfully  each  year. 
In  actual  practice,  however,  we  know  that  it  is  difficult  to  save, 
and  what  would  appear-  to  be  a  small  assistance  is  often  the 
difference  between  success  and  failure.  Life  Insurance  pro- 
vides certain  inducements  to  save.  In  the  first  place,  each 
person  receives  a  notice  a  short  time  In  advance  of  the  date 
when  his  annual  premium  Is  due,  making  It  impossible  for  him 
to  forget  the  payment  and  forming  the  habit  of  putting  away 
a  small  sum  at  regular  and  determined  intervals,  an  element 
which  has  always  been  insisted  upon  as  essential  to  the  develop- 
ment of  thrift.  This  encouragement  of  saving  undoubtedly 
results  in  many  persons  accumulating  sums  which  they  other- 
wise would  never  have.  Money  or  time  which  would  other- 
wise be  wasted  Is  utilized  for  the  purpose  of  meeting  these 
regular  payments  and  this  has  been  said  by  one  writer  to  bear 
the  same  relation  to  thrift  that  the  utilization  of  by-products 
does  to  manufacturing — much  being  saved  that  would  other- 
wise be  wasted.  In  a  savings  bank,  furthermore,  a  depositor  is 
usually  allowed  to  withdraw  his  funds  upon  short  notice  at  any 
time,  so  that  a  resolution  to  save  may  be  broken  without  seri- 
ous reflection.  Under  the  life  insurance  contract  no  with- 
drawal is  usually  permitted  during  the  first  two  years  of  the 


THE  USES  OF  INSURANCE  15 

contract,    and  sometimes   even   after   this   date   a   withdrawal 
charge  is  made. 

9.  Insurance  as  a  provision  for  old  age. — Another  form 
of  savings  must  be  referred  to  here.  In  most  cases  saving 
consists  of  putting  away  small  sums  in  order  to  accumulate  a 
large  fund,  but  the  term  may  be  equally  well  applied  to  the 
putting  away  of  a  large  sum  in  order  to  insure  the  payment  of 
a  number  of  small  sums  in  the  future.  Some  persons  who  are 
in  possession  of  considerable  money  have  no  dependents  to  pro- 
tect and  their  only  concern  is  to  make  sure  that  they  will  them- 
selves be  taken  care  of  in  their  old  age.  The  interest  on  the 
sum  they  possess  may  not  be  sufficient  for  this  purpose,  and  as 
soon  as  they  begin  to  draw  upon  the  principal,  th^y  reduce  their 
annual  income,  and  have  no  guarantee  that  they  may  not  be  so 
unfortunate  as  to  live  too  long.  Such  a  person  may,  however, 
save  his  principal  sum  by  investing  it  in  the  form  of  an  annuity, 
which  guarantees  him  an  annual  income  as  long  as  he  may  live. 
An  illustration  will  make  this  plain.  Suppose  a  man,  age  65, 
has  accumulated  $8,000,  the  interest  of  which  at  6  per  cent 
will  provide  him  with  $480  annually,  a  sum  which  is  insuffi- 
cient to  support  him.  By  using  a  portion  of  the  principal  each 
year  he  can  increase  the  sum  annually  available  to  $700  or 
$800,  but  he  runs  the  danger  that  the  principal  will  be  ex- 
hausted and  that  he  will  then  be  left  without  any  Income.  On 
the  other  hand,  for  $8,000  he  may  purchase  an  annuity  which 
will  pay  him  about  $900  a  year  until  his  death,  however  late 
that  may  occur. 

It  may  be  that  sometime  in  the  future  we  will  have  in  the 
United  States  a  form  of  insurance  which  is  common  in  Europe 
— old  age  insurance — in  which  the  worker  is  compelled,  if 
necessary,  to  lay  aside  a  portion  of  his  earnings  in  early  years 
to  support  him  in  his  old  age. 

10.  Community  benefits  of  insurance. — The  uses  so  far 
enumerated  have  been  individual  in  character  but  insurance 
also  performs  some  services  which,  while  not  designed  to 
benefit  any  particular  individual,  nevertheless  benefit  all, 
through  their  effect  upon  the  community.  Among  these  public 
services  may  be  mentioned  the  following: 

a.  Fire  insurance  and  other  forms  of  property  insurance 
encourage  the  individual  to  look  forward  to  the  future  by 
urging  him  to  provide,  not  merely  for  the  present,  but  for 
events  which  may  reasonably  be  anticipated.     Adequate  pro- 


16  INSURANCE  PRINCIPLES  AND  PRACTICES 

vision  for  the  future  distinguishes  the  civilized  from  the  sav- 
age community  and  marks  the  difference  between  stability  and 
instability  in  business.  The  principle  of  providing  for  future 
contingencies  has  long  been  recognized  in  corporation  finance 
and  its  scope  is  only  beginning  to  be  realized  in  personal  affairs 
and  business  policy  outside  of  the  field  of  finance.  Life  insurance 
goes  further  and  impels  a  man  to  provide,  not  merely  for  his 
own  lifetime,  but  even  for  the  period  after  his  death.  It  there- 
by greatly  increases  the  sense  of  responsibility  and  strengthens 
family  connections.  Similarly,  credit  insurance  is  fundamen- 
tally an  attempt  to  stabilize  business  conditions  and  title  in- 
surance performs  the  same  function  for  property  rights. 

b.  Life  insurance,  workmen's  compensation  insurance  and 
accident  and  health  insurance  relieve  the  community  of  much 
of  the  expense  which  would  otherwise  be  incurred  for  the  care 
of  dependents  left  by  the  improvident.  They  encourage  persons 
not  to  depend  upon  the  charity  of  the  state,  but  rather  upon 
their  own  efforts  to  prevent  poverty  and  distress  and  thus 
strengthen  character.  So  great  a  social  factor  has  this  been 
considered  abroad  that  systems  of  social  Insurance  have  been 
built  up,  enforced  by  and  in  some  instances  supported  by  th"e 
State.  Fires,  defalcations,  failures,  explosions,  tornadoes  and 
other  calamities  have  likewise  often  tended  in  the  past  to  im- 
poverish families  which  would  have  been  relieved  of  the  finan- 
cial shock  if  adequate  insurance  had  been  maintained. 

c.  All  forms  of  insurance,  by  lessening  the  number  of  persons 
who  are  rendered  destitute  through  such  happenings,  tend  to 
maintain  the  standard  of  living.  They  reduce  the  number  of 
unfortunate  examples  of  destitution  and  misery  which  operate 
to  lower  the  ideals  and  standards  of  conduct  of  others  who  are 
brought  in  contact  with  them. 

d.  A  well-organized  system  of  Insurance  tends  to  distribute 
equitably  the  cost  of  accidental  events  which  would  otherwise 
be  paid  in  a  haphazard  manner.  For  example,  the  cost  of  fire 
insurance  is  now  reflected  fairly  accurately  in  rents;  but  in  the 
absence  of  a  system  of  insurance  some  tenants  might  pay  exces- 
sive sums  while  others  did  not  pay  their  fair  share  of  the  fire 
losses.  Credit  losses,  Instead  of  being  cared  for  by  a  small 
and  regular  addition  to  the  selling  price,  in  the  absence  of  in- 
surance are  met  by  an  assessment  depending  on  circumstances, 
naturally  resulting  In  an  addition  sometimes  deficient  and  some- 
times excessive. 


THE  USES  OF  INSURANCE  17 

e.  All  forms  of  insurance,  if  properly  conducted,  tend  td 
reduce  the  extent  of  the  evils  they  are  designed  to  alleviate. 
The  strongest  argument  for  the  reduction  of  fire  losses,  for 
example,  is  the  pecuniary  argument  that  smaller  losses  will 
make  possible  smaller  premiums.  The  cooperative  effort, 
which  is  primarily  intended  to  collect  and  disburse  insurance 
funds,  tends  to  be  applied  in  time  to  the  reduction  of  losses. 
Thus,  fire  insurance  inspections,  life  insurance  medical  and 
nursing  services,  oversight  by  bonding  companies  of  employees, 
inspection  of  automobiles  and  of  factories,  are  expedients  In- 
troduced to  prevent  fires,  reduce  the  death  rate,  prevent  sick- 
ness, eliminate  theft  and  defalcation,  prevent  automobile  acci- 
dents and  reduce  the  number  and  severity  of  Industrial 
accidents.  These  efforts  were  fostered  and  supported  by  Insur- 
ance. 

f.  Insurance  accumulates,  from  the  small  deposits  of  many 
persons,  a  large  fund  which  may  be  Invested  and  used  In  the 
development  of  American  enterprise.  In  other  words,  vast 
funds  are  made  avalfable  as  capital  which  otherwise  would 
never  be  brought  together  in  one  place.  The  reserves  of  life, 
fire,  compensation  and  casualty  insurance  companies  represent 
the  contributions  of  millions,  each  contribution  being  insignifi- 
cant In  itself,  but  in  total  amounting  to  a  sum  equal  to  the  na- 
tional debt  of  the  United  States  In  1918.  This  vast  sum  is  dis- 
tributed among  the  securities  of  enterprises  of  all  kinds. 

g.  Insurance  has  enabled  small  business  enterprises  to  com- 
pete with  large  corporations  upon  more  equal  terms.  As  pre- 
viously remarked,  the  element  of  risk  Is  a  highly  important 
one  In  any  business.  A  large  company  can  afford  to  take  some 
risk.  If  one  of  Its  forty  buildings  burns,  the  loss  is  not  so  seri- 
ous; should  the  only  building  of  a  small  competitor  be  de- 
stroyed, all  is  lost.  The  same  is  true  of  many  other  kinds  of 
assets.  The  small  business  cannot  afford  to  take  much  risk. 
A  large  business  In  the  absence  of  Insurance  is  able  to  maintain 
a  self-insurance  fund,  because  its  .resources  are  great  enough 
and  Its  risks  sufficiently  diversified  and  distributed  to  make 
such  a  fund  of  some  value,  but  to  a  small  })uslness  this  is  a 
pure  gamble.  Insurance  has  therefore  been  of  special  benefit  to 
the  small  manufacturer  and  merchant. 

The  several  propsltions  contained  in  this  chapter  may  then 
be  summarized  as  follows: 


18  INSURANCE  PRINCIPLES  AND  PRACTICES 

(1)  The  various  services  rendered  by  insurance  are  usually 
very  inadequately  appreciated; 

(2)  There  is  a  striking  similarity  in  the  benefits  rendered 
by  all  forms  of  insurance; 

(3)  Insurance    increases    the    security    of    business    enter- 
prises ; 

(4)  Insurance  tends  to  improve  the  efficiency  of  business; 

(5)  Insurance  equitably  distributes  the  costs  of  losses; 

(6)  Insurance  is  an  Important  factor  in  the  modern  credit 
system ; 

(7)  Insurance  enables  the  capitalization  of  various  assets, 
human  and  inanimate; 

(8)  Insurance  is  Intimately  connected  with  saving  and  in 
fact  makes  the  latter  practicable; 

(9)  Insurance  provides  a  safe  investment  for  surplus  funds; 

(10)  Insurance  encourages  and  promotes  thrift; 

(11)  Insurance   furnishes  a  method  of  providing   for  old 
age; 

(12)  Insurance  is  beneficial  from  the  social  as  well  as  the 
individual  standpoint. 


Chapter  II 

THE  FUNDAMENTAL  PRINCIPLES  OF 
INSURANCE 

Definition  of  insurance. — Insurance  may  be  defined  as  a 
social  device  whereby  one  person  is  enabled  to  make  a  con- 
tract with  another,  the  second  party  agreeing  to  assume  cer- 
tain definite  risks  of  the  first  party  upon  payment  by  the  latter 
of  a  compensation  called  the  premium.  This  agreement  is 
subject  to  the  general  law  of  contract,  the  application  of  which 
is  limited  in  many  essential  respects,  however,  by  the  peculiar 
nature  of  the  contract  and  by  well-understood  customs  and 
usages  of  the  business. 

Essential  requirements  for  insurance. — In  order  that  such 
a  contract  may  operate  equitably,  produce  the  desired  benefits 
and  be  practical  from  a  business  point  of  view,  certain  condi- 
tions are  absolutely  necessary.  Briefly  stated,  these  conditions 
are  the  following: 

1.  The  insured  must  be  subject  to  a  real  risk.  This  risk 
may  be  a  loss  of  goods  or  benefits  which  he  already  possesses 
or  of  prospective  benefits  or  profits.  The  threatened  loss  may 
be  a  loss  of  visible  property  or  of  such  an  intangible  thing  as 
a  legal  right  of  action;  but  it  is  Important  that  the  contract  be 
based  upon  some  actual  possibility  of  loss  and  not  upon  the 
mere  desire  of  the  Insured  to  bet  against  the  happening  of 
some  event.  The  latter  is  a  perversion  of  the  real  function 
of  insurance.  It  Is  preferable  that  the  risk  be  one  which  can- 
not be  afiected  by  the  actions  of  the  parties  Involved;  i.e.,  that 
the  insured  cannot  himself  produce  the  event  insured  against 
or  Increase  the  probability  of  its  happening.  At  least,  he 
should  have  no  Incentive  for  so  doing,  as  otherwise  a  great 
mioral  hazard  is  involved  in  the  contract.  But  if  this  were 
strictly  adhered  to  many  forms  of  insurance  would  be  pre- 
vented from  adequately  exercising  their  legitimate  functions. 

2.  It  has  been  found  in  practice  that  the  risk  to  be  Insured 
must  be  Important  enough  to  warrant  the  existence  of  an  in- 
surance contract.  Many  policies  of  Insurance  exclude  unim- 
portant losses  as  costing  more  to  insure  than  the  value  of  the 

19 


20   INSURANCE  PRINCIPLES  AND  PRACTICES 

protection  given.  Obviously  to  cover  every  small  loss  that 
might  possibly  occur  would  be  to  greatly  increase  the  cost  of 
protection  at  the  expense  of  those  who  desire  protection  against 
really  great  hazards.  Thus  in  marine  insurance  it  is  custom- 
ary to  exempt  the  insurer  from  liability  for  small  losses;  in  com- 
pensation laws  the  injured  workman  does  not  recover  for  the 
first  few  days  of  disability,  and  in  accident  and  health  insur- 
ance various  restrictions  are  introduced  limiting  the  company's 
liability. 

3.  The  cost  of  insurance  must  not  be  prohibitive.  In  order 
to  be  of  any  great  benefit  to  a  large  portion  of  the  business 
community  the  premium  paid  must  be  sufficiently  small  to  be 
within  the  reach  of  nearly  everyone.  Otherwise  the  risks 
written  will  be  confined  to  a  small  and  select  group  of  persons 
insufiicient  in  number  to  allow  the  law  of  average  to  work. 
Likewise  the  expense  of  doing  business,  which  is  a  factor  in  the 
size  of  the  premium,  must  be  kept  within  due  proportions. 
We  have  seen  many  instances  in  the  past  where  new  methods 
of  conducting  the  insurance  business  have  been  introduced  by 
competition  because  the  expense  of  existing  methods  was  thought 
to  be  excessive.  It  is  essential  for  insurance  agents  and  brok- 
ers to  remember  that  their  income  is  derived  in  the  last  analysis 
from  the  premiums  paid  by  the  policy-holders  and  that  conse- 
quently their  existence  must  be  justified  be  rendering  some  real 
service  to  the  insured. 

4.  A  large  number  of  risks  is  necessary.  As  will  be  shown 
more  fully  later,  it  is  necessary  for  an  Insurer  to  accept  a  con- 
siderable number  of  risks  in  order  to  operate  on  a  safe  basis. 
The  natural  tendency  of  the  Insured  to  select  a  company  of 
some  size  is  not  misleading  in  the  respect  that  mere  size  In  the 
insurance  business  is  productive  of  a  real  advantage  up  to  a 
certain  point.  It  will  readily  be  recognized  that  an  insurance 
plan  involving  only  two  persons  would  be  little  better  than  each 
individual  taking  care  of  his  own  risk  personally,  and  that  it 
Is  only  by  a  combination  of  many  risks  that  any  substantial 
advantage  is  gained. 

5.  It  Is  necessary  that  the  extent  of  the  hazard  Involved  be 
capable  of  approximate  mathematical  calculation.  It  Is,  of 
course,  not  required  that  the  calculation  should  be  absolutely 
accurate.  Many  forms  of  Insurance  have  operated  for  years 
on  inadequate  statistics  but  this  has  always  resulted  In  dissatis- 
faction and  dangerous  underwriting  practices.     As  stated  in 


PRINCIPLES  OF  INSURANCE  21 

the  preceding  chapter,  one  of  the  services  of  insurance  should 
be  the  development  of  a  scientific  system  of  making  rates,  for 
any  other  method  of  doing  business  necessarily  results  in  in- 
equity between  classes  of  risks,  individual  policy-holders  and 
different  sections  of  the  country.  It  would  be  obviously  unjust 
and  impractical  to  charge  a  man  of  twenty-five  the  same  life 
insurance  premium  as  a  man  of  fifty,  or  to  charge  the  owner 
of  a  celluloid  factory  a  lower  premium  than  that  of  a  retail 
stationery  store.  Only  a  system  of  rating  which  takes  into 
account  the  probability  of  loss  will  produce  equitable  premiums 
for  the  various  classes  of  risks.  It  might  be  said  that  common 
knowledge  indicates  some  difference  between  kinds  of  risks, 
but  even  if  this  is  granted  one  cannot,  by  common  knowledge, 
arrive  at  the  degree  of  difference  between  them. 

Insurable  interest.  —  One  of  the  fundamental  principles 
among  those  enumerated  above  is  that  the  person  insured  must 
possess  some  real  interest  in  the  subject  matter  insured,  a  doc- 
trine which  has  been  spokehlDf  as  the  necessity  of  an  insurable 
interest.  It  is  this  insurable  interest  which  makes  a  contract 
between  the  insurance  company  and  the  insured  particularly 
proper.  In  all  forms  of  insurance  this  principle  has  been  rec- 
ognized by  the  courts  although,  as  we  shall  see  later,  in  life 
insurance  and  marine  insurance  considerable  departures  from 
the  principle  have  been  permitted.  While  insurable  interest 
is  necessary  to  the  contract,  insurable  interest  without  a  con- 
tract confers  no  rights  upon  its  possessor.  A  contract  of  in- 
surance has  been  held,  for  example,  to  confer  no  rights  upon 
third  parties  who  happen  for  some  reason  to  be  interested  in  the 
subject  matter  involved.  The  illustration  might  be  used  of  a 
workman  who  recovered  damages  for  an  industrial  accident 
from  his  employer.  The  employer  was  insolvent  and  the 
workman  found  himself  unable  to  collect  on  the  judgment, 
whereupon  he  had  recourse  to  a  suit  against  a  liability  insurance 
company  which  had  insured  the  employer  against  such  an  event. 
The  court  held,  however,  that  a  workman  had  no  rights  under 
a  contract  which  was  solely  between  the  employer  and  the  in- 
surance company,  even  though  his  own  injuries  might  be  the 
subject  upon  which  the  contract  depended.  In  the  same  way 
public  liability  insurance  policies  exist,  not  for  the  protection 
of  the  public  who  may  be  injured,  but  for  the  protection  of  the 
party  responsible  for  the  injury,  who  may  be  liable  for  dam- 
ages.    In  marine  insurance  an  insurance  policy  may  be  taken 


7. 


22   INSURANCE  PRINCIPLES  AND  PRACTICES 

out  by  a  freight  forwarder  and  after  a  loss  a  third  person  may 
appear  and  claim  the  proceeds  of  the  policy,  but  it  is  necessary 
for  the  latter  to  show  that  he  was  the  person  for  whom  the  in- 
surance was  intended  at  the  time  it  was  issued.  Both  an  in- 
surable interest  and  a  contract  must  therefore  be  present. 

Principles  of  probability. — The  calculation  of  premiums  for 
insurance  of  nearly  every  kind  is  based  upon  the  application 
of  the  mathematical  principles  of  probability  to  past  experience. 
In  life  insurance  these  principles  of  probability  are  applied  to 
past  experience  as  represented  by  a  mortality  table;  in  fire  in- 
surance the  principles  are  applied  to  past  experience  of  fires 
tabulated  according  to  occupancies,  types  of  buildings,  etc. ;  in 
liability  and  compensation  insurance  to  past  experience  showing 
losses  paid,  etc.  Premiums  in  insurance  are  usually  expressed 
in  the  form  of  rates,  i.e.,  by  the  amount  of  premium  per  unit 
of  protection.  Thus,  in  life  insurance  a  rate  is  quoted  per 
$1,000  of  protection,  in  fire  insurance  per  $100  of  insurance, 
in  liability  and  compensation  insurance  per  $100  of  payroll, 
in  marine  insurance  usually  per  $100  of  insurance,  and  in  ac- 
cident insurance  per  $1,000  of  principal  sum. 

The  most  important  of  the  principles  of  probability  is  that 
chance  may  be  represented  by  a  fraction,  the  numerator  of 
which  expresses  the  number  of  times  the  event  happens  and  the 
denominator  the  number  of  times  the  event  may  possibly  hap- 
pen.^ Thus  let  it  be  supposed  that  past  experience  shows  that 
out  of  10,000  houses,  50  are  burned  in  the  course  of  a  year; 
the  probability  of  a  house  being  destroyed  by  fire  is  therefore 
50/10,000.  Suppose  that  the  mortality  table  shows  that  of 
66,797  persons  alive  at  age  53,  1091  die  within  a  year;  the 
probability  of  death  at  age  53  is  then  1091/66797.  Suppose 
that  in  a  given  industry  with  an  annual  payroll  of  $2,000,000, 
the  losses  paid  on  compensation  insurance  policies  are  $6,000; 
the  probability  of  loss  in  this  industry  is  30  cents  per  $100  of 
payroll.  Applying  the  principles  of  probability  to  the  expe- 
rience of  the  past,  we  arrive  at  the  probability  that  an  event 
will  occur  in  the  future.  To  justify  such  a  conclusion  as 
this  it  is  necessary  ( 1 )  that  a  sufficiently  large  number  of 
instances  be  considered  to  give  a  dependable  average  and      (2) 

*As  expressed  in  Wentworth's  "College  Algebra":  "The  chance  of  an  event 
happening  is  expressed  by  the  fraction  of  which  the  numerator  is  the  number  of 
favorable  ways  and  the  denominator  the  whole  number  of  ways  favorable  and 
unfavorable." 


PRINCIPLES  OF  INSURANCE  23 

that  the  conditions  of  the  future  coincide  with  those  of  the  past. 
Since  the  conditions  of  the  future  do  not  ordinarily  coincide 
exactly  with  those  of  the  past,  some  allowance  must  be  made 
for  possible  changes,  and  therefore  underwriting  is  not  merely 
a  mathematical  science  but  involves  an  element  of  judgment. 

The  law  of  average. — The  probability  of  an  event  happen- 
ing is  ordinarily  spoken  of  as  the  chance  that  the  event  will 
happen.  A  distinction  must  be  made  between  this  chance  or 
degree  of  probability  and  the  degree  of  uncertainty  connected 
with  the  event.  The  function  of  insurance  is  primarily  the  re- 
duction of  the  uncertainty,  and  secondarily,  the  reduction  of 
the  probability.  For  example,  if  the  degree  of  probability  is 
zero,  the  event  is  certain  not  to  happen  and  the  degree  of  un- 
certainty is  also  zero.  As  the  degree  of  probability  increases 
to  say,  1/10,  the  degree  of  uncertainty  likewise  increases.  The 
degree  of  probability  and  the  degree  of  uncertainty  continue  to 
increase  together  up  to  a  certain  point,  but  when  the  degree  of 
probability  reaches  a  certain  height,  i.e.,  as  the  chance  of  an 
event  happening  becomes  more  certain,  the  degree  of  uncer- 
tainty diminishes,  until  when  the  probability  becomes  a  cer- 
tainty, the  degree  of  uncertainty  is  again  zero.  The  degree  of 
uncertainty  is  therefore  entirely  different  from  the  degree  of 
probability  and  it  is  the  former  to  which  we  are  now  referring. 

Let  us  suppose  that  out  of  10,000  lives,  on  the  average,  10 
die  every  year.  The  probability  is  therefore  1/1000,  or  .001. 
Suppose,  however,  that  from  year  to  year,  although  the  aver- 
age is  10  deaths,  the  figures  vary,  showing  as  few  as  8  deaths 
some  years  and  other  years  as  high  as  12  deaths.  The  range 
is  from  8  to  12,  and  the  variation  from  the  average  may  be 
said,  roughly,  to  be  4.  The  degree  of  uncertainty  may  be 
crudely  expressed  relatively,  then,  by  the  fraction  4/10,000  or 
.0004.  Suppose  then  that  1,000,000  lives  are  insured.  The 
probability  is  .001  or  1,000  deaths.  On  a  large  number  of  lives, 
however,  the  variation  from  year  to  year  will  be  relatively  much 
less,  probably  only  from  980  to  1020,  a  variation  of  40  or 
.00004.  This  is  a  figure  considerably  smaller  than  .004.  The 
degree  of  probability  in  our  two  illustrations  remains  the  same, 
but  the  degree  of  uncertainty,  experience  shows,  is  considerably 
reduced  when  we  deal  in  larger  numbers.  It  is  the  function  of 
insurance  to  combine  a  large  number  of  risks  and  thus  reduce 
the  degree  of  uncertainty.  We  can  predict  the  future  much 
more  accurately  with  regard  to  a  group  of  risks  than  we  can  for 


24  INSURANCE  PRINCIPLES  AND  PRACTICES 

an  individual  risk,  of  which  our  future  knowledge  is  practically 
zero.  We  can  say  that  out  of  1,000,000  persons,  400  will  die 
within  a  year,  but  the  fate  of  any  individual  is  a  mystery  and 
must  remain  such.  This  idea  is  sometimes  described  as  the 
"law  of  average." 

Consequences  of  the  law  of  average  in  insurance. — In  in- 
surance there  are  many  important  consequences  of  the  law  of 
average,  some  of  which  are: 

1.  Insurance  is  the  exact  opposite  of  gambling.  In  gam- 
bling two  persons  deliberately  set  about  to  create  some  hazard 
for  pleasure  or  profit;  they  introduce  the  element  of  risk  where 
it  previously  did  not  exist.  Insurance,  however,  is  designed  as 
a  hedge  against  risks  which  are  already  present,  the  object  be- 
ing to  neutralize  the  existing  risk.  Thus  a  person  who  be- 
comes the  owner  of  property  assumes  the  risk  that  it  will  burn, 
and  takes  out  a  policy  of  insurance  to  eliminate  this  risk  or  at 
least  reduce  its  consequences.  Every  person  living  runs  the 
risk  of  dying,  every  person  in  foreign  trade  assumes  the  risk 
that  his  goods  will  be  lost  at  sea,  every  manufacturer  runs  the 
risk  that  some  person  will  be  injured  on  his  premises  and  that 
he  will  be  held  responsible,  every  buyer  of  property  runs  the 
risk  that  his  title  will  prove  to  be  defective,  every  employer 
runs  the  risk  that  his  employee  will  prove  to  be  dishonest.  In- 
surance is  designed  to  reduce  these  existing  risks  instead  of 
creating  new  ones. 

2.  Insurance  is  preeminently  social  in  nature.  It  represents, 
In  the  highest  degree,  cooperation  for  mutual  benefit.  Various 
individuals  who  are  all  subject  to  similar  risks  combine  to  re- 
duce the  consequences  of  these  risks,  many  thousands  of  per- 
sons paying  premiums  that  the  unfortunate  few  may  be  indem- 
nified for  the  losses  which  will  occur.  This  principle  of  mu- 
tuality is  present  in  a  stock  company  organized  for  profit  as 
well  as  in  a  so-called  mutual  company,  because  in  the  last  anal- 
ysis losses  are  paid  from  premiums.  The  stockholders  of  the 
stock  company  are  supposed  to  make  a  profit  merely  as  a  re- 
ward for  directing  and  managing  the  cooperative  scheme. 

3.  Insurance  involves  the  accumulation  of  large  funds  to 
meet  future  contingencies.  Thus  we  find  that  in  life  insurance 
reserves  are  built  up  to  reduce  future  premiums,  in  fire  insur- 
ance to  meet  future  losses,  in  liability  and  compensation  insur- 
ance to  meet  claims  and  suits  which  will  appear  in  the  future. 
Since  these  funds  so  accumulated  are  the  property  of  thousands 


PRINCIPLES  OF  INSURANCE  25 

of  insured  persons,  the  State  has  intervened,  and,  as  a  matter 
of  public  policy,  has  regulated  their  use.  The  investments  of 
insurance  companies  are  governed  by  state  statutes  designed  to 
preserve  such  funds  for  the  purpose  for  which  they  were 
intended. 

4.  Large  catastrophes  prevent  the  proper  working  of  the 
law  of  average.  A  San  Francisco  fire  is  an  exceptional  hap- 
pening which  no  one  can  foresee  and  to  which  past  experience 
furnishes  no  guide.  One  method  of  attempting  to  reduce  the 
consequences  of  such  losses  upon  the  financial  standing  of  an 
insurance  company  is  to  secure  a  wide  distribution  of  risks. 
Thus  a  company  which  insured  risks  in  the  city  of  San  Francisco 
alone  would  have  been  made  insolvent  by  its  losses,  the  pre- 
miums collected  being  insuflficient  to  meet  the  claims  presented. 
But  most  of  the  fire  insurance  companies  involved  were  writing 
insurance  not  only  in  San  Francisco  but  over  the  entire  world. 
A  wide  distribution  of  risks,  furthermore,  reduces  the  variation 
in  losses  from  year  to  year  and  consequently  renders  the  opera- 
tion of  the  insurance  business  more  certain  and  sure. 

5.  It  is  also  essential  to  the  law  of  average  that  the  size  of 
the  individual  risk  shall  not  vary  too  greatly.  We  would  not 
expect  the  losses  of  an  insurance  company  to  remain  uniform  if 
it  insured  500,000  risks  for  $1  each  and  five  risks  for  $100,- 
000  each.  A  few  losses  on  the  latter  risks  would  be  suflficient 
to  upset  all  the  calculations  that  could  be  made.  It  is  cus- 
tomary in  nearly  every  form  of  insurance  to  limit  the  size  of 
the  risk  which  will  be  accepted.  Thus  in  life  insurance,  $100,- 
000  on  any  one  life  is  a  limit  frequently  used;  in  fire  insurance, 
companies  sometimes  will  not  accept  more  than  $20,000  in 
congested  districts  where  a  conflagration  risk  exists.  Natur- 
ally the  maximum  risk  which  will  be  accepted  depends  to  a 
large  extent  upon  the  size  of  the  company  concerned.  As  a 
result  of  this  limitation  of  risk  the  practice  of  re-insurance  has 
developed,  whereby  a  company  which  has  accepted  a  risk  greater 
in  size  than  it  desires  re-insures  a  portion  in  another  company 
or  companies. 

6.  The  proper  working  of  the  law  of  average  is  also  based 
upon  a  random  selection  of  risks.  In  some  forms  of  insur- 
ance, however,  of  which  life  insurance  is  a  good  example,  poorer 
risks  exclusively  would  present  themselves  for  insurance  and  as 
a  consequence  the  insurance  company  institutes  a  system  of  se- 
lection whereby  sub-standard  lives  are  rejected  or  at  least  are 


26  INSURANCE  PRINCIPLES  AND  PRACTICES 

charged  a  higher  premium  than  the  normal  risk.  In  fire  in- 
surance very  little  selection  is  exercised  but  the  same  results 
are  attained  by  making  the  rates  proportionate  to  the  hazard 
involved.  The  violation  of  this  principle  has  been  well  illus- 
trated by  the  experience  of  some  fraternal  societies  whose  mem- 
bers were  admitted  without  medical  examination  and  the  same 
rate  charged  everyone  without  regard  to  age.  Such  fraternal 
but  inequitable  method  cannot  long  continue  because  the  so- 
ciety accumulates  a  large  number  of  extremely  poor  risks.^ 

Differences  between  life  and  other  forms  of  insurance. — 
We  have  seen  that  in  a  great  many  respects  all  forms  of  in- 
surance are  similar.  It  would  be  a  mistake  not  to  notice,  how- 
ever, some  of  the  differences  between  life  insurance  and  other 
forms  of  protectioon.  The  principal  differences  to  be  noted 
are  the  following: 

1.  The  event  which  is  contemplated  In  life  insurance  is  a 
certain  event,  the  only  uncertainty  being  the  time  when  the  event 
will  occur.  A  vessel  insured  under  a  marine  policy  may  or 
may  not  be  lost;  a  workman  covered  by  a  workman's  compensa- 
tion policy  may  or  may  not  be  injured;  but  death  comes  some 
time  to  all.  The  marine  insurance  company,  the  fire  insurance 
company  and  the  casualty  company  may  or  may  not  be  called 
upon  to  pay  a  claim  on  a  given  risk,  but  every  ordinary-life 
contract  results  in  a  claim.  One  writer  has  very  properly  de- 
scribed this  by  saying  that  the  life  insurance  premium  must 
provide  two  funds,  one  against  the  certainty  of  death  at  an 
advanced  age  and  one  against  the  possibility  of  premature 
death. 

2.  The  classification  of  risks  in  life  Insurance  is  generally 
more  simple  than  in  other  forms  of  insurance.  All  risks  are 
first  divided  into  two  great  classes — those  which  are  insurable 
and  those  which  are  not.  Those  risks  which  are  insurable  are 
then  sub-divided  Into  age  groups.  In  some  companies,  where 
persons  of  Impaired  health  are  accepted,  each  age  group  is 
again  sub-divided  into  standard  and  sub-standard  risks.  In 
other  forms  of  insurance,  however,  there  is  usually  a  multi- 
plicity of  classifications.  Thus  in  fire  insurance  every  building 
differs  from  others  in  some  particular  and,  aside  from  dwell- 
ing and  churches,  these  differences  are  so  great  that  schedules 
are  required  to  appraise  risks.  In  marine  insurance  a  hundred 
different  factors  contribute  to  make  up  the  hazard  on  a  given 

'  See  Appendix  XIV. 


PRINCIPLES  OF  INSURANCE  27 

risk',  such  as  the  voyage,  the  season  of  the  year,  the  type  of 
vessel,  etc.  In  accident  and  health  insurance  a  chissification 
based  upon  occupations  is  used  and  in  compensation  insurance 
risks  are  rated  according  to  the  type  of  Industry. 

3.  In  most  forms  of  insurance  the  contract  is  for  a  term  of 
one  year  and  often  is  cancelable  by  either  party  before  this 
term  has  expired.  The  life  insurance  contract,  on  the  other 
hand,  while  it  may  be  canceled  by  the  Insured,  cannot  be  can- 
celed by  the  company,  and  therefore  Is  usually  a  long  term  con- 
tract. Furthermore,  a  company  cannot  change  the  premium 
during  the  course  of  this  long  period. 

4.  The  principle  of  Indemnity  Is  more  strictly  adhered  to 
in  property  Insurance  than  in  life  Insurance.  Ordinarily  a 
property  owner  may  not  recover  more  than  the  actual  cash 
value  of  the  property  destroyed,  while  a  life  may  be  Insured  for 
any  sum  within  reason.  This  question  will  be  further  dis- 
cussed later  in  connection  with  Insurable  Interest,  where  It  will 
be  shown,  however,  that  the  principle  of  indemnity  In  property 
Insurance,  emphasized  by  many  text  writers,  Is  only  relatively 
recognized. 


Chapter  III 
TYPES  OF  INSURANCE  ORGANIZATIONS 

Classification  of  insurance  organizations. — In  all  forms  of 
insurance  the  insured  is  offered  his  choice  of  a  number  of  dif- 
ferent organizations  for  the  purpose  of  insuring  his  risk.  These 
organizations  may  be  broadly  classified  into  six  groups;  (1) 
self-insurance;  (2)  stock  companies;  (3)  mutual  associa- 
tions; (4)  reciprocal  underwriters  or  inter-insurers;  (5) 
Lloyds;  (6)  government  or  state  agencies.  To  consider  the 
advantages  and  disadvantages  of  each  type  of  organization  sep- 
arately for  every  form  of  insurance  would  be  a  tremendous  as 
well  as  an  uninteresting  task,  inasmuch  as  the  same  ground 
would  have  to  be  covered  many  times.  Each  of  these  types 
has  certain  characteristics,  whether  it  be  writing  life,  casualty 
or  property  insurance,  and  from  these  characteristics  its  advan- 
tages and  disadvantages  naturally  follow.  We  shall  therefore 
devote  this  chapter  to  a  general  discussion  of  these  various  or- 
ganizations, irrespective  of  the  type  of  insurance  business  in 
which  they  are  engaged,  merely  pointing  out  important  quali- 
fications relating  to  particular  businesses. 

1.  Self -insurance. — Self-insurance  is  the  endeavor  of  one 
who  is  subject  to  a  risk  to  lay  aside  periodically  sums  which  in 
time  will  provide  a  fund  for  reimbursing  him  for  any  loss 
which  may  occur.  In  the  absence  of  insurance  proper  this  is 
the  only  method  available.  Its  advantages  and  defects  are  al- 
most self-evident.  It  is  apparent  that  if  the  insured  himself 
operates  the  insurance  fund  he  has  it  entirely  within  his  own 
control  at  all  times,  can  regulate  the  amount  spent  for  expenses 
and,  finally,  any  reduction  in  the  risk  involved  is  a  direct  sav- 
ing to  him.  Thus  if  a  person  attempts  to  provide  a  fund 
against  his  own  death  he  is  obliged  to  furnish  only  the  net 
amount  required.  No  commission  is  paid  to  an  agent  for  writ- 
ing the  insurance;  no  fees  are  paid  to  the  State  for  the  privi- 
lege of  doing  business;  no  salaries  are  paid  to  officials  for  man- 
aging the  fund.  If  the  insured  regulates  his  habits  and  thereby 
increases  his  lifetime  by  five  years  the  benefit  accrues  directly 

28 


TYPES  OF  INSURANCE  ORGANIZATIONS     29 

to  him.  These  facts  would  be  equally  true  of  any  type  of  risk. 
But  to  provide  a  fund  to  take  care  of  losses  takes  time.  Sup- 
pose that  he  lays  aside  $1,000  per  year  and  has  a  loss  of 
$10,000  the  second  year.  It  is  apparent  that  this  is  not  in- 
surance in  the  real  sense  of  the  word. 

Such  a  plan  may  be  attempted,  of  course,  under  widely  vary- 
ing conditions.  The  illustration  of  life  insurance  furnishes  an 
extreme  case  of  a  field  in  which  self-insurance  is  entirely  in- 
applicable. Here,  as  we  have  previously  seen,  the  person  whose 
life  is  at  risk  has  no  assurance  that  the  fund  he  accumulates  will 
be  sufficient,  by  the  time  the  loss  occurs,  to  cover  that  loss.  He 
has  no  distribution  of  risks  and  consequently  no  law  of  average 
to  rely  upon.  This  is  not  self-insurance;  it  is  gambling  with 
death.  On  the  other  hand,  let  us  suppose  that  a  shipping  com- 
pany possesses  fifty  vessels  ranging  from  $40,000  to  $80,000  in 
value,  all  engaged  in  different  trades.  Let  us  suppose  that  the 
corporation  has  figured  that  $50,000  is  the  correct  amount  to  be 
annually  set  aside  in  the  insurance  fund.  In  this  case  the  self- 
insurance  plan  can  be  operated  with  a  greater  prospect  of  suc- 
cess. It  is  hardly  likely  that  many  of  these  vessels  will  be  lost 
in  any  one  year,  and  should  the  losses  or  repair  bills  of  one  year 
be  extremely  high,  it  is  probable  that  the  following  years  will 
be  low  enough  to  counter-balance  this  exceptionally  poor  luck. 
There  are  two  elements  here  present  which  were  not  present  in 
the  life  insurance  illustration;  (1)  a  number  of  risks  are  cov- 
ered instead  of  one,  and  (2)  the  risks  are  distributed  and  not 
subject  to  identical  hazards.^ 

Between  these  two  extremes  are  varying  degrees  of  safety 
in  the  self-insurance  plan.  Where  the  two  elements  described 
above  are  present  the  disadvantages  of  the  self-insurance  plan 
are  considerably  reduced.  Where  these  elements  are  to  a  large 
degree  lacking  it  would  be  much  better  for  the  business  man 
to  at  least  supplement  his  self-insurance  plan  for  a  time  with 

*  Compare,  for  example,  the  variations  in  fire  losses  in  these  two  cases: 

Penna.  R.  R.  Co.  City  of  Philadelphia 

1908 $10,583  $  2,469 

1909 20,115                                           

1910 18,808  5,313 

1911 19,722  47,434 

1912 20,343  10,939 

1913 47,298  2,043 

1914 18,468  8,865 


30  INSURANCE  PRINCIPLES  AND  PRACTICES 

some  other  form  of  protection;  later,  if  the  self-insurance  plan 
is  successful  he  may  gradually  reduce  the  other  forms  of  insur- 
ance he  carries.  In  attempting  to  carry  his  own  liability  or 
compensation  insurance  he  must  bear  in  mind  also  that  the 
cost  is  likely  to  increase,  inasmuch  as  claims  continue  to  come  in 
long  after  the  accidents  have  occurred.  States  usually  permit 
self-insurance  of  the  compensation  risk  only  where  the  employer 
can  satisfy  the  authorities  that  he  is  financially  able  to  carry  the 
risk. 

2.  Mutuals. — The  self-insurance  plan  is  plainly  inadvisable, 
due  to  the  risk  involved,  for  the  small  owner  who  possesses 
only  one  or  a  few  properties.  Therefore  a  mutual  plan  has 
been  devised  whereby  small  owners  are  enabled  to  insure  them- 
selves by  combining  their  risks.  The  various  individuals  pro- 
ceed to  do  jointly,  under  this  plan,  what  would  be  impossible 
individually.  We  might  take  the  law  of  one  State  as  an  illus- 
tration of  the  manner  in  which  a  mutual  fire  insurance  com- 
pany may  be  organized.  At  the  time  of  organization  a  guar- 
antee capital  of  not  less  than  $25,000  must  be  provided  by 
issuing  shares  which  shall  receive  dividends  of  not  more  than 
7  per  cent  annually.  This  guarantee  capital  is  Intended  only 
as  security  for  the  payment  of  losses  until  the  mutual  is  fairly 
started  in  business  and  is  applied  to  losses  only  after  its  other 
assets  have  been  exhausted.  When  the  surplus  of  the  mutual 
amounts  to  2  per  cent,  of  the  total  insurance  in  force  the  guar- 
antee capital  shall  be  retired  and  such  capital  may  be  retired 
by  vote  of  the  policy-holders  and  the  consent  of  the  insurance 
commissioner  when  the  net  assets  of  the  company  over  and  above 
its  liabilities  and  reserve  are  for  two  years  last  preceding  its 
last  annual  statement  equal  to  25  per  cent,  of  the  guarantee 
capital.^ 

Under  this  plan  every  member  of  the  mutual  organization 
becomes  an  insurer  and  an  insured.  Every  member  makes  him- 
self liable  for  his  share  of  the  losses  which  may  occur.  It  may 
happen  that  the  premiums  collected  are  In  excess  of  the  amount 
needed  to  pay  losses,  in  which  case  the  excess  is  returned  to  the 
policy-holder  as  a  "dividend" — this  term  being  a  misnomer.  In- 
asmuch as  the  return  is  really  not  profits  but  saving.  States 
have  sometimes  mistakenly  decided  to  tax  such  dividends  as  if 
they  were  similar  to  the  profits  made  by  a  commercial  under- 

*  See  Appendix  CI.,  for  balance  sheet  and  statement  of  a  marine  insurance 
mutual.     See  also  Appendix  XXIX  and  page  96. 


TYPES  OF  INSURANCE  ORGANIZATIONS     31 

taking.  If,  on  the  other  hand,  the  amounts  collected  are  in- 
sufficient to  pay  the  losses,  the  members  of  the  mutual  organi- 
zation may  be  called  upon  to  pay  an  assessment.  Thus  the 
law  referred  to  above  provides  that  mutuals  shall  collect  the 
full  premium  in  cash  or  notes  payable,  but  the  contingent 
liability  of  each  member  shall  be  not  less  than  an  amount  equal 
to  the  cash  premium  written  in  the  policy.  The  policy-holder 
is  liable  for  all  losses  incurred  while  he  is  a  member  of  the 
organization. 

It  follows  from  what  has  been  said  above  that  the  amount 
for  which  the  member  of  the  mutual  organization  is  liable  is 
indefinite.  The  premium  which  he  originally  pays  may  or  may 
not  be  sufficient  to  cover  the  losses  which  subsequently  occur. 
Some  of  what  he  has  paid  may  be  returned  to  him  or  he  may 
be  called  upon  to  pay  more.  It  is  apparent  then,  that  the 
mutual  organization  may  follow  either  of  two  policies.  It 
may  collect  in  advance  a  sum  more  than  sufficient  to  cover  the 
risk  and  return  the  balance,  or  it  may  collect  an  insufficient 
amount  with  the  idea  that  it  will  later  collect  anything  addi- 
tional which  may  be  required.  The  former  plan  has  usually 
been  successful;  the  latter  usually  a  failure.  This,  of  course, 
is  a  general  statement  and  not  intended  as  a  reflection  on  or  a 
recommendation  of  any  particular  organization  following  either 
plan. 

We  can  briefly  summarize  the  remaining  features  of  the  mu- 
tual by  stating  the  advantages  and  disadvantages  claimed  for 
the  plan.     The  advantages  are: 

a.  Where  no  commissions  or  very  small  ones  are  paid  to 
agents,  mutuals  claim  to  be  able  to  do  business  at  a  smaller 
cost  than  other  organizations.  (This  does  not  apply  to  life 
insurance.) 

b.  Any  profits  or  savings  which  are  made  go  to  the  policy- 
holders and  not  to  the  stockholders. 

c.  The  mutual  is  theoretically  under  the  control  of  the  policy- 
holders. 

d.  The  mutual  can  exercise  a  more  careful  selection  of  risks. 
(Inapplicable  to  life  insurance.) 

e.  The  mutual  is  interested  in  the  reduction  of  losses. 

f.  Many  mutuals  have  operated  without  finding  it  necessary 
to  call  for  assessments. 

g.  The  policy-holders  will  naturally  look  after  their  owa 
interests  very  carefully. 


32  INSURANCE  PRINCIPLES  AND  PRACTICES 

The  disadvantages  which  the  mutual  is  said  to  be  under  are 
as  follows: 

a.  If  small,  the  mutual  runs  the  danger  of  being  unable  to 
pay  losses  in  case  of  great  disaster. 

b.  If  working  in  a  large  territory,  the  advantage  of  selection 
of  risks  and  of  careful  oversight  is  partially  lost. 

c.  No  second  party,  such  as  the  stockholder,  intervenes  be- 
tween the  policy-holder  and  possible  loss. 

d.  The  contract  Is  indefinite,  since  the  policy-holder  may  be 
called  upon  to  pay  further  premiums. 

e.  The  expenses  of  agents  are  justified  by  the  service  they 
render  and  these  services  are  not  fully  rendered  by  mutuals. 

f.  The  control  of  a  mutual  is  in  reality  no  more  in  the  hands 
of  the  average  policy-holder  than  is  the  stock  company  control. 

g.  The  mutual  is  no  better  managed  than  the  stock  company 
because  the  stockholders  of  the  latter  are  very  careful  about  the 
management,  since  their  dividends  depend  upon  it. 

In  life  insurance  mutual  companies  have  gradually  attained 
a  position  of  preeminence;  at  the  present  time  their  number  and 
the  amount  of  business  written  exceeds  that  of  the  stock  com- 
panies. With  the  exception  of  the  fact  that  policy-holders  in 
a  mutual  company  receive  a  participating  policy,  there  is  little 
difference  between  the  mutual  and  the  stock  life  insurance  com- 
pany. Even  this  difference  almost  disappears  when  the  divi- 
dends of  the  life  Insurance  company  stockholders  are  limited 
to  a  definite  figure,  such  as  6  per  cent.,  and  the  stock  company 
Issues  only  participating  policies.  In  compensation  Insurance, 
likewise,  the  mutual  companies  have  gradually  obtained  a  great 
share  of  the  business,  although  In  most  States  a  larger  amount 
Is  still  written  by  stock  companies.  In  casualty  Insurance  the 
mutual  Is  little  known,  and  In  marine  insurance  there  is  only 
one  Important  mutual  In  the  United  States.  In  fire  Insurance, 
"factory  mutuals"  and  mutuals  formed  In  particular  trades 
have  been  successful  and  have  come  to  occupy  a  well-recognized 
position  in  the  business. 

3.  Reciprocals. — The  reciprocal  organization  Is  a  develop- 
ment of  the  mutual  idea.  Here  the  various  policy-holders  are, 
as  In  the  mutual,  both  Insured  and  insurers.'  The  active  head 
of  the  organization,  however.  Is  an  attorney-in-fact  who  has 
been  given  authority  to  conduct  the  affairs  of  the  organization 
through  powers  of  attorney  conferred  upon  him  by  the  various 

'For  statement  of  a  reciprocal  see  Appendix  LX. 


TYPES  OF  INSURANCE  ORGANIZATIONS     33 

members.     The  entire  management  is  subject  to  his   control 
with  only  such  limitations  as  are  provided  for  by  the  terms  of 
the  organization  and  the  written  powers  of  attorney/ 
•     The  advantages  of  this  form  of  organization  most  frequently 
referred  to  are  the  following: 

a.  The  elimination  of  expense  through  the  conduct  of  the 
business  at  cost,  with  the  exception  of  any  amount  which  may 
be  paid  the  attorney  for  his  services.  The  amount  which  the 
attorney  is  to  receive  and  the  expenses  are  usually  limited  in 
some  manner. 

b.  The  elimination  of  profit,  Inasmuch  as  the  excess  which 
is  collected  is  refunded  to  the  policy-holder. 

c.  The  direct  interest  which  each  member  has  in  the  success 
of  the  organization. 

d.  Some  provisions  usually  exist  for  preventing  large  losses 
through  conflagration,  such  as  a  re-insurance  arrangement  with 
another  insurance  organization. 

e.  Elimination  of  the  cost  of  the  constant  struggle  to  obtain 
new  business  In  the  form  of  commissions  to  agents. 

f.  Assessments  are  usually  limited.  Whether  such  limita- 
tion Is  legal  or  not  is  hard  to  say. 

Such  organizations  are  criticised  on  the  following  grounds: 

a.  The  fact  that  the  cost  of  a  policy  Is  Indefinite,  the  mem- 
bers being  liable  for  assessment, 

b.  The  Immense  control  which  rests  In  the  hands  of  the  at- 
torney-in-fact, whose  authority  Is  only  recalled  by  the  members 
revoking  their  powers  of  attorney. 

c.  The  large  sums  which  have  been  made  by  attorneys  who 
have  operated  such  plans  for  their  personal  profit  alone. 

d.  The  failures  of  some  reciprocals,  due  to  inability  to  pay 
losses  or  collect  assessments. 

Reciprocals  are  quite  common  in  the  fields  of  fire  insurance 
and  automobile  insurance.^  The  method  has  been  very  little 
applied  in  life,  accident,  health,  compensation  or  marine  Insur- 
ance. 

4.  Stock  companies. — A  stock  company  Is  organized  for 
profit,  the  stockholders  being  entitled  to  any  gains  that  may 
result  from  the  operation  of  the  business  and  responsible  for 
any  losses  which  may  be  Incurred.  The  capital  Is  provided  by 
the  sale  of  shares  of  stock  and  the  law  requires  a  certain  mln- 

*  For  power  of  attorney  used  see  Appendix  LVIII. 
'  For  policy  see  Appendix  LIX. 


34  INSURANCE  PRINCIPLES  AND  PRACTICES 

imum  paid-in  capital,  which  must  be  maintained  unimpaired. 
Usually  a  stock  company  possesses  also  a  more  or  less  substan- 
tial surplus  as  an  additional  guarantee  to  the  policy-holders.*' 
The  stockholders  adopt  by-laws  and  obtain  a  charter  from  the 
State  authorities,  after  which  officers  and  directors  are  elected. 
The  advantages  claimed  for  the  stock  company  are: 

a.  A  good  business  organization  which  operates  efficiently. 

b.  Expenses  maintained  at  a  low  figure  because  the  stock- 
holders' self-interest  requires  this. 

c.  Better  service  than  is  afforded  by  mutuals  and  reciprocals. 

d.  A  definite  contract  of  insurance  with  the  premium  ab- 
solutely fixed  In  advance. 

e.  A  capital  and  surplus  as  a  guarantee  and  protection  to 
policy-holders. 

f.  Usually  a  good  distribution  of  risks  and  consequently 
better  working  of  the  law  of  average. 

On  the  other  hand  its  disadvantages  are  claimed  to  be: 

a.  A  high  expense  rate  due  to  the  Impersonal  character  of 
the  management  and  the  commissions  paid  to  agents. 

b.  No  better  service  than  Is  rendered  by  other  organizations. 

c.  Control  of  the  company  Is  in  the  hands  of  the  stockholders 
and  not  the  policy-holders. 

d.  Experience  has  shown  that  mutuals,  etc.,  have  been  able 
to  operate  safely  at  lower  rates. 

e.  The  distribution  of  risk  Is  no  more  satisfactory  than  that 
of  a  large  mutual  or  other  organization. 

The  stock  company  is  found  In  all  fields  of  insurance.  Its 
principal  advantages  are  the  definite  contract  which  it  is  able 
to  offer  and  the  capital  and  surplus  which  serve  as  a  guarantee 
to  the  policy-holder  for  the  payment  of  possible  losses.  The 
competition  In  the  Insurance  business  Is  keen  and  the  rate  of 
failure  among  stock  companies,  as  well  as  others,  has  been 
very  high. 

5.  Lloyds  associations. — The  most  prominent  association 
of  this  type  Is  Lloyds  of  London,  which  has  served  as  a  model 
for  similar  organizations.  The  Lloyds  Association  is  an 
association  of  individual  underwriters,  eilch  of  whom  be- 
comes personally  liable  for  the  amount  of  insurance  for 
which  he  subscribes.  It  is  therefore  insurance  written  by 
individuals  as  contrasted  with  insurance  written  by  companies 
or  associations.     One  individual  is  not  responsible  for  the  ful- 


0 


For  statement  of  a  stock  fire  insurance  company  see  p.  247. 


TYPES  OF  INSURANCE  ORGANIZATIONS     35 

fillment  of  the  obligation  of  others.  London  Lloyds  Is  an 
extremely  strong  organization  that  has  a  long  and  satisfactory 
history,  for  the  membership- is  very  carefully  selected  and  de- 
posits are  required  for  the  security  of  the  policy-holders.  The 
necessity  of  upholding  its  past  reputation  compels  this  associa- 
tion to  see  to  the  prompt  payment  of  its  members'  obligations. 
Unfortunately,  some  organizations  bearing  the  name  of  Lloyds 
were  not  operated  upon  the  same  basis  and  have  brought  the 
name  into  some  disrepute  In  this  country,  although  a  number 
of  successful  organizations  have  been  In  existence  for  some 
time. 

The  advantages  of  this  form  of  organization  are : 

a.  Their  business  is  usually  limited  to  some  specific  line 
where  careful  selection  of  risks  Is  possible. 

b.  IVIany  persons  who  are  Insured  are  also  underwriters,  al- 
though this  Is  not  necessarily  true. 

c.  Individuals  of  large  financial  resources  are  often  under- 
writers on  policies,  with  unlimited  liability. 

d.  By  operation  within  a  restricted  territory,  expenses  are 
considerably  reduced. 

e.  Agents'  commissions  are  sometimes  dispensed  with. 
The  criticisms  of  such  associations  have  been: 

a.  The  security  of  the  organization  depends  entirely  upon 
the  Individuals  who  compose  It. 

b.  Some  organizations  allow  members  to  limit  their  liability, 
so  that  a  number  of  good  underwriters  are  found  to  be  liable 
only  to  a  very  limited  degree. 

c.  Such  organizations  have  been  frequently  used  by  dis- 
honest persons  as  a  source  of  personal  profit. 

d.  Their  operations  are  very  diflficult  of  government  regu- 
lation by  reason  of  the  individual  nature  of  the  contract. 

e.  The  resources  of  the  underwriters  are  sometimes  Insufii- 
cient  for  the  amount  of  risk  undertaken. 

Such  associations  are  unknown  In  life,  accident,  health  and 
compensation  insurance,  but  common  In  fire  and  marine  in- 
surance. London  Lloyds,  however,  accepts  risks  of  every  class, 
even  to  contracts  which  are  practically  gambles,  such  as  the 
insurance  of  losses  through  the  state  of  the  weather,  the  fall 
of  kings  and  a  state  of  war. 

6.  State  insurance. — By  State  Insurance  we  understand  an 
insurance  enterprise  operated  by  the  State  or  nation,  the  gov- 
ernment assuming  liability  for  the  payment  of  the  losses.   Such 


2,6  INSURANCE  PRINCIPLES  AND  PRACTICES 

plans  are  not  numerous  in  the  United  States,  although  gov- 
ernment insurance  in  Europe  is  quite  common.  The  most  suc- 
cessful form  of  State  insurance  in  the  United  States  has  been 
the  "State  fund"  organized  for  the  insurance  of  the  compensa- 
tion risk.^  These  are  more  fully  discussed  in  the  chapter  on 
liability  and  compensation  insurance.  The_State  usually  furn- 
ishes a  fund  with  which  to  begin  business,  which  fund  assumes 
practically  the  form  of  a  mutual  managed  by  the  State.  The 
premiums  collected  are  usually  slightly  less  than  the  premiums 
of  the  stock  companies  and  the  balance  remaining  after  the 
payment  of  losses  is  returned  to  the  policy-holders.  Some  State 
funds  have  been  very  successful,  others  only  moderately  so, 
while  still  others  have  been  criticised  as  inefficient,  wasteful 
and  unsatisfactory.  Such  State  funds  may  be  divided  into  two 
classes : 

1.  Those  which  are  made  monopolies,  no  other  form  of  com- 
pensation insurance  being  permissible. 

2.  Those  which  are  competitive,  existing  side  by  side  with 
the  stock  companies  and  private  mutuals. 

One  State  in  this  country  has  attempted  to  operate  life 
and  fire  insurance  plans,  but  thus  far  none  of  these  attempts 
can  be  considered  a  great  success.*  The  principal  obstacles  to 
the  plan  seem  to  be  :  ( 1 )  the  inability  to  secure  a  sufficient  vol- 
ume of  business  and  (2)  the  political  character  of  the  man- 
agement. The  natural  results  of  these  two  factors  are  a  high 
expense  rate,  a  small  volume  of  business  and  insufficient  assets 
to  meet  losses.  National  government  insurance  of  marine 
risks  was  very  extensively  adopted  during  the  war  and  served 
to  supplement  the  efforts  of  private  companies  to  supply  the 
large  amount  of  insurance  then  demanded.  In  the  United 
States  this  form  of  insurance  was  very  helpful  in  meeting  the 
emergency  then  existing  but  afterward  was  abandoned.  It 
served  the  purpose  of  insuring  American  and  Allied  vessels  and 
cargoes  against  the  ordinary  marine  perils  and  against  the  war 
risk.  Likewise  the  government  maintained  a  fund  for  the  self- 
Insurance  of  its  own  vessels. 

When  the  United  States  became  actively  engaged  In  the 
World  War  in  1917,  It  was  soon  realized  that  some  provision 
should  be  made  for  insuring  the  lives  of  soldiers  and  sailors. 
At  the  same  time  It  was  evident  that  the  rates  which  old  line 

'  See  Appendix  XXVIII  for  a  statement  of  operations  of  such  a  State  fund. 
*  See,  for  example,  the  State  life  insurance  fund  of  Wisconsin. 


TYPES  OF  INSURANCE  ORGANIZATIONS     37 

companies  would  have  to  charge  for  so  dangerous  an  occupa- 
tion were  prohibitively  high.  Congress  therefore  decided  that 
the  Government  should  bear  the  excess  burden  and  on  Octo- 
ber 6,  1917,  passed  the  War  Risk  Insurance  Act  which,  in  ad- 
dition to  providing  for  family  allowances  and  allotments,  and 
compensation  for  death  or  disability,  granted  benefits  In  the 
form  of  voluntary  Insurance.  In  order  to  administer  the 
affairs  of  such  an  undertaking,  a  separate  division  was  estab- 
lished In  the  Treasury  Department  known  as  the  Bureau  of 
War  Risk  Insurance,  which  was  placed  under  the  supervision 
of  a  Director,  subject  to  the  general  supervision  of  the  Secre- 
tary of  the  Treasury. 

None  but  those  actively  engaged  in  the  service  of  the  Army 
or  Navy  was  eligible  to  obtain  this  Insurance,  which  was 
granted  upon  application  to  the  Bureau  and  without  medical 
examination  within  120  days  of  entrance  to  the  service  (or  be- 
fore April  6th,  1917)  and  before  discharge  or  resignation. 
The  applications  were  handled  through  the  Army  and  Navy 
Insurance  and  Allotment  Officers  designated  In  the  Quarter- 
master and  Paymaster  Corps  respectively. 

The  type  of  insurance  was  a  one-year  renewable  term  poHcy 
of  the  increasing  step-rate  variety,  convertible  into  a  perma- 
nent form  within  five  years  after  the  signing  of  the  proclama- 
tion of  peace.  The  amount  obtainable  was  a  multiple  of  $500 
and  not  less  than  $1,000  nor  more  than  $10,000,  and  the  rates 
charged  were  the  net  rates  of  the  American  Experience  Table 
on  a  3^  per  cent,  basis,  reduced  to  a  monthly  premium.  The 
coverage  was  for  death  or  total  and  permanent  disability,  and 
the  proceeds  In  event  of  loss  were  payable  at  the  rate  of  $5.75 
each  month  per  $1,000  of  Insurance  in  force.  The  total  In- 
surance written  on  this  plan  reached  approximately  38  billions 
of  dollars.  The  premiums  collected  during  the  war  amounted 
to  300  millions,  and  the  losses  to  over  one  billion,  which  means 
that  the  United  States  bears  a  loss  of  over  700  millions,  pay- 
able from  other  revenue. 

In  regard  to  the  conversion  privilege  and  In  pursuance  of 
Section  404  of  the  Act,  regulations  have  been  Issued  specify- 
ing the  types  of  insurance  into  which  the  temporary  or  war 
insurance  may  be  converted.  Thus  far,  six  kinds  of  perma- 
nent policies  have  been  Issued: 

1.  Ordinary-Life. 

2.  Twenty-payment  Life. 


38   INSURANCE  PRINCIPLES  AND  PRACTICES 

3.  Thirty-payment  Life. 

4.  Twenty-year  Endowment. 

5.  Thirty-year  Endowment. 

6.  Endowment  maturing  at  age  62, 

The  rates  on  these  are  calculated  on  the  same  basis  as  the  tem- 
porary insurance  except  that  allowance  is  made  for  annual, 
semi-annual  and  quarterly  premiums.  In  this  connection  it 
should  be  explained  that  under  the  original  Act  no  provision 
was  made  for  the  separation  of  this  converted  insurance 
from  the  temporary,  nor  was  any  settlement  made 
possible  except  by  monthly  installments.  An  amendment  to 
the  Act  was  passed  December  24,  1919,  and  among  other 
liberal  provisions  it  provides  for  settlement  by  means  of  a  lump 
sum  or  other  optional  methods;  it  extends  the  class  of  possible 
beneficiaries;  and  it  authorizes  a  separate  life  insurance  fund 
in  the  United  States  Treasury  for  the  converted  insurance. 

These  changes,  added  to  the  fact  that  the  insurance  is  par- 
ticipating, that  all  overhead  and  administrative  expenses  are 
borne  by  direct  government  appropriation  and  that  it  includes 
the  most'  liberal  total  and  permanent  disability  clause  ever 
placed  in  a  policy,  make  it  most  attractive.  However,  the 
insurance  was  not  "sold"  originally  and  as  a  result  the  lapses 
have  been  enormous,  only  the  more  intelligent  having  retained 
their  insurance.  Even  the  liberal  reinstatement  provisions  pro- 
mulgated by  the  Bureau  have  been  only  partially  successful  in 
preventing  lapses.  The  early  administration  of  the  Act  was 
faulty  in  the  extreme,  and  the  greatest  efforts  are  now  required 
to  correct  the  confusion  and  abuses  caused  thereby.^ 

"  For  a  statement  of  operations  of  the  War  Risk  Bureau,  see  Appendix  XV. 


Chapter  IV 
ORGANIZATION  OF  THE  INSURANCE  BUSINESS 

Organization. — A  discussion  of  the  organization  of  the 
insurance  business  must  be  divided  into  two  parts.  We  must 
distinguish  in  the  first  place  between  personal  insurance  and 
property  insurance,  where  the  systems  of  doing  business  are 
sufficiently  different  to  warrant  such  distinction;  and  secondly, 
between  the  internal  organization  of  a  company  and  the  volun- 
tary agreements  entered  into  by  companies  and  agents  intended 
to  foster  common  action. 

Personal  Insurance. — The  following  discussion  is  based 
upoQ  the  organization  of  a  life  insurance  company,  but  many 
of  the  statements  made  are  equally  applicable  to  the  transaction 
of  the  accident,  health  and  compensation  insurance  business. 
The  best  introduction  to  this  subject  is  a  presentation  of  the 
excellent  outline  of  Mr.  J.  B.  Lunger.^ 

Officials: 

r  Board  of  Directors 

A.  Deliberative    bodies "> 

L  Committees  of  the  Board 

r  President 

B.  Executive  officials \    Vice-Presidents 

L  Treasurer 

r  Comptroller 

C.  Administrative  officials.  A    Secretary 

L   Superintendent  of  Agents 

r  Actuary 

D.  Advisory  officials \    Medical   Director 

L   Counsel 

Directed  by  the  above  officials  we  find  the  following  office 
departments : 

I.  Agency 

II.  Financial 

III.  Actuarial 

IV.  Medical 
V.  Legal 

VI.  Bookkeeping 
VII.  Auditing 
VIII.  Claims 
IX.  Real  Estate  Loans 
X.  Policy-W^riting 

^"Yale  Insurance  Lectures,"  Volume   1,  pp.  112-125. 

39 


40   INSURANCE  PRINCIPLES  AND  PRACTICES 

XI.  Policy  Loans 

XII.  Inspection 

XIII.  Policyholders'  Bureau 

XIV.  Editorial  and  Advertising 
XV.  Supply 

XVI.  Mail 
XVII.  Filing 

To  co-ordinate  the  work  of  departments,  committees  of 
officials  meet  as  follows : 

I.  Committee  on  Agency  Methods 

II.  Committee  on  Review  of  Applications 

III.  Committee  on  Clerical  Efficiency 

IV.  Committee  on  Claims 

V.  Committee  on  Office  Methods  and  Systems 

It  is  hardly  within  the  scope  of  this  volume  to  attempt  a  con- 
sideration of  the  various  duties  and  classifications  of  the  diff- 
erent offices  and  departments,  as  we  would  then  be  entering 
the  field  of  corporate  management.  We  therefore  pass  to  a 
consideration  of  that  portion  of  the  organization  with  which 
the  policy-holder  comes  in  more  direct  contact,  namely  the  field 
force. 

The  Field  Force. — An  agency  system  is  apparently  an 
absolute  necessity  in  life  insurance,  since  one  of  the  strongest 
companies,  after  giving  up  the  solicitation  of  business,  saw  its 
policies  in  force  dwindle  to  almost  nothing.  This  part  of  the 
organization  is  highly  important  for  at  least  two  reasons.  ( 1 ) 
It  keeps  the  organization  alive  as  a  going  concern,  and  (2)  it 
is  the  point  of  contact  between  the  company  and  the  policy- 
holder. 

General  Agents  and  Managers. — The  methods  of  handling 
agents  may  be  classified  in  two  groups  ( 1 )  the  general  agency 
system,  and  (2)  the  branch  office  system. 

1.  The  General  Agency  System. — This  method  consists  in 
dividing  the  country  into  territories,  to  each  of  which  is  as- 
signed a  general  agent  who  has  control  over  the  definite  field 
for  which  he  is  responsible.  If  he  produces  results  he  may 
regard  the  district  as  peculiarly  his.  On  all  business  which 
may  be  written  within  that  territory  he  is  entitled  to  a  certain 
initial  commission  and  renewal  commisisons  on  subsequent 
premiums  paid.  The  general  agent  agrees  to  promote  the 
company's  interests;  to  use  his  best  efforts  in  obtaining  and 
maintaining  a  satisfactory  agency  force;  to  pay  his  own  ex- 
penses   and    to    employ    the    required    sub-agents.      In    some 


ORGANIZATION  OF  INSURANCE  BUSINESS  41 

instances  the  general  agent  is  a  large  producer  of  business  him- 
self and  in  others  he  is  principally  an  executive  who  employs 
and  directs  others  who  actually  write  the  business.  In  any 
event  it  will  be  noticed  that  the  general  agent  works  to  a 
large  degree  on  his  own  account  and  pays  his  own  expenses. 
His  remuneration  depends  upon  his  success. 

2.  The  Branch  Office  System. — When  organized  according 
to  this  method  the  company  establishes  districts  throughout  the 
country  and  places  them  in  charge  of  branch  office  managers. 
A  branch  office  is  under  the  manager's  direction,  but  his  powers 
are  more  limited  than  those  of  a  general  agent,  inasmuch  as  he 
is  directly  under  the  control  of  the  home  office,  while  the  general 
agent  usually  manages  his  territory  in  any  manner  he  pleases 
as  long  as  satisfactory  results  are  produced.  The  manager 
secures  agents  and  directs  their  work  but  the  contracts  made 
with  such  agents  are  subject  to  the  approval  of  the  home  office. 
The  remuneration  of  the  manager  consists  of  ( 1 )  a  definite 
salary,  and  (2)  certain  bonuses  for  increases  in  the  volume  of 
business.  It  will  be  noticed  that  the  manager  is  thus  merely 
an  extension  of  the  office  itself. 

In  conjunction  with  either  of  the  above  plans  we  may  have 
the  appointment  of  agents  directly  by  the  home  office,  who  are 
not  subject  to  the  supervision  of  the  general  agents  or  managers 
and  whose  territory  may  be  more  or  less  restricted.  There  is 
also  in  life  insurance  the  brokerage  system,  whereby  the  seller 
of  life  insurance  effects  an  agreement  for  remuneration  with  the 
general  agents  of  several  companies;  but  under  these  circum- 
stances he  is  really  an  agent  of  several  companies  rather  than 
a  broker  in  the  sense  that  this  term  is  usually  understood. 

Each  of  the  methods  referred  to  above  has  certain  advantages 
and  disadvantages;  both  have  been  successfully  applied. 

Agents. — Under  either  the  agency  system  or  the  branch 
office  system  the  bulk  of  the  business  is  obtained,  not  by  gen- 
eral agents  or  managers,  but  by  sub-agents  employed  by  them. 
Under  the  agency  system  these  sub-agents  are  really  employed 
by  the  general  agent,  although  they  may  be  legally  considered 
as  agents  of  the  company.  The  general  agent  enters  into  a 
contract  with  them  whereby  they  agree  to  certain  terms  of 
employment  and  receive  in  return  an  initial  commission  and 
renewal  commissions  on  subsequent  premiums.  Commissions 
are  usually  in  the  form  of  percentages  of  the  premium  paid 
by  the  insured.     Thus  the  general  agent  may  pay  over  to  the 


42  INSURANCE  PRINCIPLES  AND  PRACTICES 

sub-agents  his  whole  initial  commissions  and  a  certain  propor- 
tion of  the  renewal  commissions  he  receives  from  the  company. 
Or  the  general  agent  may  pay  to  the  sub-agent  a  proportion 
of  both  his  initial  commission  and  subsequent  commissions.^ 
Under  the  branch  office  system,  of  course,  the  agent  receives 
his  commissions  directly  from  the  company.  Two  methods  of 
paying  commissions  have  been  utilized.  The  first  system  is 
to  pay  the  agent  from  25  to  50  per  cent  of  the  initial  premium 
and  thereafter  5  per  cent  on  subsequent  premiums  for  a  term 
of  say,  eight  years.  Another  system  is  to  pay  the  agent  a 
considerably  higher  percentage  of  the  initial  premium  and  to 
dispense  with  renewal  commissions. 

Property  insurance. — The  system  described  below  is  that  of 
fire  insurance,  but  the  main  outline  is  generally  true  of  marine 
insurance  and  casualty  insurance.  The  arrangements  for  cor- 
porate bonding,  title  insurance  and  credit  Insurance  vary  some- 
what. 

General  agents. — If  the  extent  of  business  warrants  It,  the 
company  may  divide  the  country  into  districts,  placing  each  in 
charge  of  a  general  agent.  The  general  agent  in  this  case  Is 
only  an  extension  of  the  home  office,  making  contracts  with 
agents  and  subject  to  more  or  less  strict  supervision  by  the 
home  office. 

Special  agents. — The  special  agent  is  a  direct  representative 
of  the  company  and,  as  his  name  indicates,  is  employed  for 
particular  duties.  He  is  the  direct  connection  between  the 
home  office  and  the  agent,  or  between  the  general  agent  and 
the  local  agent.  It  Is  his  business  to  travel  about  the  country 
examining  the  work  done  by  the  local  agencies,  offering  sug- 
gestions as  to  how  the  business  may  be  improved,  contributing 
his  services  In  connection  with  rating  problems,  and  settling  im- 
portant losses.  The  latter  work  is  more  generally  performed, 
however,  by  a  special  agent  known  as  an  adjuster.  The  special 
agent  Is  supposed  to  be  both  an  aid  to  the  local  agent  and  a 
check  upon  his  work. 

Local  agents. — The  local  agent  Is  the  representative  of  the 
company  who  directly  writes  the  business.  In  general,  his  acts 
and  his  knowledge  are  considered  the  acts  and  knowledge  of 
the  company,  although  certain  limitations  are  placed  upon  his 
authority.  The  company  depends  to  a  considerable  extent  upon 
his  judgment  in  accepting  a  risk.    Unlike  life  Insurance  agents, 

'  See  the  agent's  contract  in  appendix  V. 


ORGANIZATION  OF  INSURANCE  BUSINESS  43 

he  has  policies  in  his  possession  which  go  into  force  when 
countersigned  by  him.  Unlike  life  insurance  agents,  also,  he 
usually  has  a  certain  amount  of  control  over  the  business  he 
writes  and  his  clientele  is  much  more  his  personal  property. 
He  forwards  to  the  company  copies  of  the  policies  written  ac- 
companied by  a  daily  report,^  and  his  financial  transactions  are 
recorded  upon  a  monthly  report*  which  is  forwarded  to  the 
company  and  which  forms  the  principal  basis  for  the  book- 
keeping of  the  latter.  The  remuneration  of  the  agent  is  a 
commission  in  the  form  of  a  percentage  of  the  premium.  The 
agent  usually  represents,  not  one,  but  several  companies.  He 
sometimes  has  an  exclusive  territory  but  in  large  cities  is 
usually  required  to  compete  with  others  who  are  writing 
business  in  the  same  locality.^  The  commission  systems  em- 
ployed are  the  following: 

1.  Flat  commissions,  where  the  agent  receives  the  same  per- 
centage of  commission  on  all  kinds  of  business,  say  25  per 
cent. 

2.  Flat  and  contingent  commissions,  where  the  agent  re- 
ceives a  flat  minimum  percentage  on  premiums  reported  from 
month  to  month,  and  an  additional  payment  at  the  end  of  the 
year  if  the  underwriting  result  on  his  business  is  profitable.  For 
instance,  he  may  receive  a  15  per  cent,  flat  commission  and 
10  per  cent,  extra  on  the  difference  between  the  premiums  and 
the  losses  and  expenses. 

3.  Graded  commissions,  where  the  percentage  of  the  pre- 
mium received  by  the  agents  depends  upon  the  class  of  busi- 
ness written.  Thus,  he  may  receive  25  per  cent,  on  dwellings, 
public  buildings  and  their  contents,  etc. ;  20  per  cent. 
on  churches,  schools,  colleges  and  their  contents;  20  per  cent, 
on  brick  and  stone  mercantile  buildings  and  15  per  cent,  on 
the  contents  of  brick  or  stone  mercantile  buildings. 

Brokers. — The  broker,  as  contrasted  with  the  agent,  is  the 
agent  of  the  Insured  and  not  of  the  company,  in  spite  of  the 
fact  that  he  directly  derives  his  income  from  the  latter.  The 
insured  is  therefore  generally  responsible  for  the  acts  of  the 
broker,  while  the  company  is  usually  responsible  for  the  acts 
of  an  agent.  The  broker  solicits  the  insurance  from  the  prop- 
erty owners  and  sells  the  same  to  the  company  either  directly 

'  See  appendix  XLVII. 
*  See  appendix  XLVIII. 
^  See  appendix  XLIX  , 


44  INSURANCE  PRINCIPLES  AND  PRACTICES 


or  through  an  agent.  Where  conditions  are  more  complex, 
the  services  of  the  broker  become  more  valuable.  Thus  in 
large  cities  he  furnishes  the  insured  with  the  advice  and  serv- 
ice necessary  under  these  conditions,  adapting  the  policy  to  his 
needs,  seeing  that  the  necessary  insurance  is  maintained,  obtain- 
ing the  proper  kind  of  policy  with  the  necessary  endorsements, 
and  advising  him  In  case  of  loss. 

Associations." — In  all  forms  of  insurance  it  has  been  found 
desirable  to  obtain  concerted  action  by  means  of  associations. 
In  life  insurance,  such  associations  have  been  largely  confined 
to  improving  the  moral  tone  of  the  business,  regulating  the 
conduct  of  agents  and  affording  a  means  whereby  agents  can 
protect  their  interests  by  common  action.  In  other  forms  of 
insurance,  however,  such  associations  have  assumed  very 
broad  and  important  powers.  The  fire  insurance  business  fur- 
nishes the  best  illustration  of  the  extent  to  which  such  associa- 
tions influence  the  conduct  of  the  business. 

Fire   underwriters'   associations.^ — The    following   outline 

will  give  a  general  idea  of  the  different  kinds  of  associations 

and  the  scope  of  their  work: 

CLASSIFICATION  OF  ASSOCIATIONS 

According  to: — 

National 

Sectional 

T        ,      f     Urban 
Local     <      c   u     u 

I.     Suburban 

I  Technical  and  educational.  Regulation 
'  \  of  brokers  and  agents.  Rate-making 

r  Company    representatives 
<    Special  agents 

(^  Agents  and  broke 
I^No  distinction 


1.  Jurisdiction    < 


2.  Functions 


Occupation  of 
members 


ters 


3.  Membership  < 


Classification  of    > 


between  members 


members 


Requirements 


1.  Without     qualifica- 

Classified  J        tion  of  voting  power 

membership  j  2.  With      qualification 

of  voting  power 

{Adherence   to   agreed   commissions   to 
agents 
Adherence  to  stated  scale  of  brokers' 
compensation 

'A  considerable  portion  of  the  following  is  adapted,  with  the  kind  permission 
of  the  publications  concerned,  from  the  author's  monograph  on  "Fire  Under- 
writers' Associations,"  Chronicle  Co.,  N.Y. ;  his  article  on  "Fire  Insurance 
Rates"  in  the  Quarterly  Journal  of  Economics,  August,  1916;  and  his  article  on 
"Ratemaking  Organizations  in  Fire  Insurance,"  ylnnals  of  the  American  Acad- 
emy, March,   1917. 

'  Adapted,  with  permission,  from  Robert  Riegel,  'Tire  Underwriters  Associa- 
tions in  the  United  States."     The  Chronicle  Co.,  Ltd.,  New  York,  1916. 


ORGANIZATION  OF  INSURANCE  BUSINESS  45 

These  cooperative  bodies  at  the  present  time  may  be  divided 
into  three  classes:  (1)  the  very  numerous  local  associations, 
which  govern  rates,  commissions  and  brolcerage  charges;  (2) 
the  sectional  bodies  which  restrict  commissions  and  to  some 
extent  supervise  rates;  and  (3)  the  national  associations, 
which  are  now  rather  indirectly  concerned  with  rates  and 
whose  principal  services  are  educational  and  technical  In  char- 
acter. If  we  omit  the  minor  detail  of  extent  of  jurisdiction, 
we  may  make  a  two-fold  classification;  (1)  educational  and 
technical  associations  and  (2)  commission-regulating,  rate- 
making  bodies.  Among  the  latter  are  some  composed  of  com- 
pany representatives,  some  of  special  agents,  some  of  local 
agents  and  brokers.  All,  however,  constitute  merely  an  effort 
to  do  cooperatively  what  had  previously  been  accomplished 
individually.^ 

Example  of  a  national  association. — The  most  Important 
national  association  Is  the  National  Board  of  Fire  Under- 
writers, organized  in  1866,  membership  in  which  is  open,  by 
election  at  a  meeting  or  by  action  of  its  Executive  Committee, 
to  any  stock  fire  Insurance  company  doing  business  In  the 
United  States.  There  are  now  about  one  hundred  and  sixty 
member  companies.  Until  1878  It  was  a  rate-making  organ- 
ization but  since  that  time  It  has  exercised  neither  jurisdiction 
over  rates  nor  concerned  itself  with  them  and  is  conducted 
along  lines  best  designated  as  "  educational  and  technical," 
having  the   following  purposes: 

1.  To  promote  harmony,  correct  practices,  and  the  princi- 
ples of  sound  underwriting;  to  devise  and  give  effect  to  meas- 
ures for  the  protection  of  the  common  interests,  and  to  pro- 
mote such  laws  and  regulations  as  will  secure  stability  and 
solidity  to  capital  employed  In  the  business  of  fire  insurance 
and  protect  It  against  oppressive,  unjust,  and  discriminative 
legislation. 

2.  To  repress  Incendiarism  and  arson  by  combining  In  suit- 
able measures  for  the  apprehension,  conviction,  and  punishment 
of  criminals  guilty  of  those  crimes. 

3.  To  gather  such  statistics  and  establish  such  classification 
of  hazards  as  may  be  for  the  Interest  of  members. 

4.  To  secure  the  adoption  of  uniform  and  correct  policy 
forms  and  clauses,  and  to  endeavor  to  agree  upon  such  rules 
and  regulations  In  reference  to  the  adjustment  of  losses  as 

*  For  examples  of  their  jurisdiction  see  maps,  Appendix  L. 


46  INSURANCE  PRINCIPLES  AND  PRACTICES 

may  be  most  desirable  and  in  the  best  interest  of  all  concerned. 

5.  To  influence  the  introduction  of  safe  and  improved 
methods  of  building  construction,  encourage  the  adoption  of 
fire  protective  measures,  secure  efficient  organization  and 
equipment  of  fire  departments  with  adequate  and  improved 
water  systems,  and  establish  rules  designed  to  regulate  all 
hazards  constituting  a  menace  to  the  business.  Every  mem- 
ber is  in  honor  bound  to  co-operate  with  every  other  member 
to  accomplish  the  desired  objects  and  purposes  of  the  Board. 

The  expenses  of  the  Board  are  borne  by  assessments  upon 
member  companies  in  proportion  to  their  net  fire  premiums 
in  the  United  States,  and  are  apportioned  upon  the  receipts 
of  the  preceding  year.  The  officers  are  a  president,  vice-presi- 
dent, secretary  and  treasurer.  The  activities  of  the  association, 
as  of  most  underwriters'  associations,  are  controlled  by  various 
committees,  each  of  which  devotes  its  attention  to  a  particular 
field. 

The  services  of  national  associations. — We  may  summar- 
ize the  services  of  national  associations  of  the  type  considered 
as  follows; 

1.  They  educate  the  public  to  an  understanding  of  the  value 
of  insurance  in  the  reduction  of  risk. 

2.  They  bring  about  harmonious  co-operation  of  fire  com- 
panies and  underwriters  toward  aims  broader  than  merely  pro- 
viding indemnity  for  loss. 

3.  They  have  reduced  various  expenses  which,  of  course, 
ultimately  fall  upon  the  insured,  such  as, 

a.  Expense  of  watching  legislation. 

b.  Expense  of  protesting  against  unjust  laws. 

c.  Expense  of  reducing   arson. 

The  effectiveness  of  efforts  along  these  lines  has  been  cor- 
respondingly increased. 

4.  They  have  compiled  and  published  statistics  of  the  insur- 
ance business  which  are  recognized  as  standard — the  National 
Board  Tables — and  have  made  instructive  comparisons  of  data. 

5.  They  have  endeavored  to  reduce  arson  and  incendiarism. 

6.  They  have  inspected  and  criticised  the  protective  facil- 
ities of  cities  and  towns  and  have  suggested  improvements 
therein. 

7.  They  have  furnished  consulting  engineers  to  assist  in 
all  kinds  of  construction  and  to  give  advice  on  apparatus  and 
ordinances. 


ORGANIZATION  OF  INSURANCE  BUSINESS  47 

8.  They  have  set  up  standards  for  the  installation  of  light- 
ing and  heating  devices. 

9.  They  have  formulated  codes  as  guides  to  correct  build- 
ing. 

10.  They  have  improved  methods  of  adjusting  losses. 

11.  They  have  been  largely  instrumental  in  causing  the 
adoption  of  a  standard  fire  policy  and  have  formulated  stand- 
ard forms  and  clauses. 

12.  They  have  tested  and  inspected  fire  preventive  and  pro- 
tective devices  of  all  kinds  and  have  established  a  standard  of 
efficiency   for   such   devices. 

13.  Finally,  they  have  been  the  greatest  factor  in  educating 
the  public  to  the  fact  that  reduction  in  fire  losses  means  reduc- 
tion In  insurance  premiums  and  that  the  latter  Is  principally 
dependent   on   the   former. 

The  above  is  only  a  partial  list  of  the  services  rendered  by 
these  organizations;  yet  It  Is  hoped  that  it  is  sufiicient  to  show 
the  benefits  derived  by  the  public  from  their  existence,  sup- 
ported though  they  are  principally  by  private  capital.  Their 
very  existence  is  suflScIent  to  show  that  Insurance  companies 
and  underwriters  are  not  concerned  wholly  with  furnishing 
Indemnity,  and  with  profits  and  losses,  but  perform  other  real 
and  useful  services  to  society.  While  Indemnity  for  loss  is  an 
indirect  and  negative  service  of  Insurance  In  the  sense  that 
insurance  does  not  replace  what  is  lost,  the  above  presents 
another  aspect  of  the  business,  showing  results  which,  although 
Indirect,   are  yet  positive   In   character. 

Services  and  functions  of  sectional  and  local  associa- 
tions.— We  now  proceed  to  consider  the  sectional  and  local 
associations,  which  are  commission-regulating,  rate-making 
bodies.  We  may  pass  over  the  form  of  their  organization, 
which  is  generally  a  system  of  committee  government,  and 
concentrate  attention  upon  the  purposes  for  which  they  were 
organized  and  upon  the  services  they  have  rendered. 

These  sectional  and  local  associations  were  necessities  of 
the  times  for  the  prevention  of  rate-cutting  and  excessive  ex- 
pense and  for  the  enforcement  of  cooperation.  They  have 
performed  the  following  economic  functions: 

I.  Services  in  promoting  economy. 

A.  In  the  making  of  fire  Insurance  rates  they  enable  the 
saving  of  great  labor  and  expense.  A  single  Inspection  and 
a  single  rating  suflftce  for  all  the  companies  In  a  given  territory 


48   INSURANCE  PRINCIPLES  AND  PRACTICES 

and  a  common  agency  performs  the  work,  for  all.  Instead  of 
thousands  of  inspectors  individually  acting  as  expert  buyers 
(as  they  may  be  termed)  for  separate  companies,  which  nat- 
urally involved  great  duplication  of  effort,  a  much  smaller 
number  is  sufficient  to  enable  these  associations  to  make  a  com- 
mon rate  for  all  companies  on  each  risk  in  a  given  territory. 
These  rates  are  distributed  to  agents  operating  in  the  territory 
who  are  members  of  the  association.  Cooperative  action, 
with  its  consequent  saving,  replaced  individual  effort.  Nor 
does  this  accurately  measure  the  extent  of  the  saving,  for  we 
have  not  considered  that  reduction  of  expense  which  naturally 
follows  specialization  and  division  of  labor. 

B.  One  methoci  of  meeting  competition  in  a  period  of  un- 
restrained rivalry  is  by  increased  commissions  to  agents.  Above 
a  reasonable  figure  this  is  no  advantage  to  the  insured;  it  is 
rather  an  added  burden.  By  means  of  associated  action  ex- 
cessive commissions  are  prevented  and  the  "rebate"  elimi- 
nated.'' 

C.  A  watchful  eye  may  be  kept  upon  insurance  legislation 
without  duplication  of  expense,  in  order  to  prevent  laws  which 
are  prejudicial  alike  to  insurer  and  insured. 

II.   Services  in  promoting  standardization. 

A.  Nothing  has  had  so  much  influence  upon  the  develop- 
ment of  scientific,  standard  methods  of  rating  as  these  sectional 
and  local  associations.  They  have  also  furnished  an  agency 
through  which  rate-making  systems  generally  may  be  intel- 
ligently applied  and  new  systems  developed.  When  a  num- 
ber of  companies  pool  their  facilities  to  obtain  a  rate  it  must 
be  admitted  that  the  result  is  more  probably  just  and  adequate 
than  where  the  charge  is  the  result  of  competition  or  is  influ- 
enced by  it.  It  is  impossible  for  ruinous  competition  in  the 
insurance  business  to  prove  of  any  lasting  advantage  to  the 
policy-holder.  In  most  other  businesses  the  result  of  com- 
petition among  producers  or  distributors  is  an  advantage,  more 
or  less  permanent,  to  the  consumer.  In  purchasing  insurance, 
however,  it  is  impossible  for  him  to  receive  the  same  article  at 
the  reduced  price.  The  commodity  he  purchases  is  not  deliv- 
ered to  him  at  once  but  over  a  term  of  one  year,  three  years 
or  five  years.  If  the  price  is  reduced  by  25  per  cent,  the  sta- 
bility of  the  selling  company  is  reduced  and  this  stability  is 
the  only  guarantee  that  the  consumer  will  receive  the  paid-for 

•  See  Appendix  XLIX. 


ORGANIZATION  OF  INSURANCE  BUSINESS  49 

protection.  The  company,  in  other  words,  after  the  advance 
payment  of  the  premium,  stands  in  the  position  of  debtor  to 
the  insured  and  it  is  to  the  advantage  of  the  latter  to  have 
it  in  as  good  financial  condition  as  possible.  Adequate  rates 
are,  therefore,  to  the  common  interest  and  in  bringing  them 
about  the  associations  render  a  service  to  all.  Stamping  de- 
partments, through  which  all  policies  have  to  pass,  were  estab- 
lished to  prevent  secret  price-cutting  and  promote  standardiza- 
tion. There  is  a  division  of  opinion  on  the  subject  of  loss  sta- 
tistics; but  if  they  are  of  value  in  rate-making  the  association 
presents  itself  as  an  effective  medium  for  their  collection  and 
standardization. 

B.  They  standarize  the  reductions  which  are  made  for 
"long-term"  policies  and  establish  standard  tables  of  "short- 
term  rates.-''' 

C.  The  advantages  which  resulted  from  the  adoption  of 
a  standard  fire  policy  will  be  shown  later.  Similar  benefits 
have  resulted  from  the  activities  of  the  associations  in  stand- 
ardizing clauses  and  forms." 

III.  Services  in  general. 

A.  By  mutual  acquaintance  and  expulsion  of  undesirable 
members  the  associations  have  reduced  objectionable  practices 
in  the  business  to  a  minimum.  In  this  respect  they  may  be 
compared  with  stock  and  produce  exchanges. 

B.  Mutual  consultation  and  assistance  have  enabled 
underwriters  to  formulate  policies  to  meet  local  and  national 
emergencies. 

C.  They  have  been  instrumental  in  preventing  fire,  and  in 
increasing  fire  protection  facilities. 

Organizations  of  underwriters  were  formerly,  and  are 
under  the  present  system,  as  much  economic  necessities  as  rail- 
road traffic  associations,  steamship  pools,  export  associations, 
lumber  dealers'  associations,  trades  unions  or  butter  and  egg 
"exchanges."  They  were  necessary  to  terminate  rate  wars 
and  to  insure  against  future  endangering  of  company  solvency 
by  struggles  for  business  at  inadequate,  profitless  rates.  Even 
the  insured  derived  no  benefit  from  the  latter.  In  no  business 
is  a  price  reduction  at  the  expense  of  quality  an  undiluted  ad- 
vantage, and  every  inadequate  insurance  rate  reduced  the  sta- 
bility of  the  company  and  the  value  of  its  promise  to  pay  in- 

"  See  Chapter  XVI,  p.  236. 

"  See  Appendices  XXXI  to  XL  inclusive. 


50  INSURANCE  PRINCIPLES  AND  PRACTICES 

demnity.  The  small  property  owner,  indeed,  suffered  a  reduc- 
tion in  his  prospective  indemnity's  quality  without  enjoying 
any  corresponding  cheapness  of  rate;  for  the  large  insurer,  in 
an  era  of  unstable  rates,  is  always  the  one  able  to  command 
the  reductions.  The  history  of  the  railroad  business  is  a  well- 
known  example  of  this  fact.  Competition  in  rates  results  in 
discrimination;  the  tariff  associations  were  designed  to  pro- 
mulgate  and   enforce   uniform    charges. 

In  spite  of  the  legitimacy  of  the  associations'  objects,  the 
advantages  of  which  have  long  been  recognised  in  foreign 
countries,  abuses  crept  into  the  system  while  unrestrained  by 
intelligent  regulation.  The  opponents  of  the  system  alleged, 
and  in  some  instances  proved,  ( 1 )  an  absence  of  classified 
statistics  to  support  the  rates  made,  (2)  discrimination,  and 
(3)  arbitrary  control  of  the  licensing  of  brokers.  These  are 
considered  at  greater  length  in  the  chapter  on  fire  insurance 
rates.^^ 

"  For  a  more  extended  discussion  of  Underwriters'  Associations  see  Robert 
Riegel,  "Fire  Underwriters'  Associations,"  Chronicle  Co.,  N.  Y. 


Part   II 
PERSONAL  INSURANCE 


51 


Chapter  V 

TYPES  OF  LIFE  INSURANCE  POLICIES 

Importance  of  selecting  the  proper  policy. — When  securing 
a  life  insurance  policy  there  are  two  things  in  which  the  pur- 
chaser is  preeminently  interested.  First,  he  wants  to  know 
how  much  he  has  to  pay  in  the  form  of  a  premium  and  sec- 
ondly, what  the  insurer  promises  in  return.  Both  will  depend 
on  the  nature  of  the  policy  obtained,  for  many  variations 
exist.  These  differences  have  been  introduced  to  meet  the 
needs  and  circumstances  of  distinctive  cases,  with  the  result 
that  a  person  desiring  insurance  protection  can  secure  a  policy 
which  meets  his  requirements  and  fits  his  pocketbook.  It 
should  not  be  assumed  from  this  that  any  one  policy  is 
"cheaper"  or  "better"  than  another,  except  for  a  particular 
purpose,  because  all  are  on  a  mathematically  equivalent  basis; 
and  although  the  premium  on  one  type  of  policy  may  be  lower 
than  on  another,  the  difference  is  mathematically  justified.  In 
all  cases  the  insured  gets  just  what  he  pays  for,  no  more  and 
no  less;  the  price  of  life  insurance,  unlike  the  price  of  many 
other  commodities,  is  based  on  cost.  While  no  particular 
policy  is  universally  better  than  another,  there  is  usually  one 
policy  that  is  more  nearly  adapted  to  individual  needs  than 
any  other,  as  is  true  of  other  commodities.  Prices,  sizes  and 
styles  vary  to  meet  the  desires  and  requirements  of  the  buyer. 
Therefore  we  proceed  to  a  discussion  of  the  various  types  of 
policies  and  the  circumstances  to  which  they  are  best  suited, 
viewing  them  with  respect  to  ( 1 )  what  the  insured  must  pay, 
and  (2)  what  he  or  his  beneficiary  receives.^ 

The  single-premium  policy. — To  start  at  one  extreme,  let 
us  first  take  the  case  of  a  wealthy  individual,  the  owner  of  a 
large  and,  at  present,  prosperous  enterprise.  He  is  now  amply 
supplied  with  cash  but  he  knows  that  history  supplies  many 
examples  of  men  who  were  once  rich  and  later  poor.  He 
knows  that  a  business  which  has  taken  years  to  build  up  may 

*  For  sample  of  a  life  insurance  policy  see  Appendix  III. 

53 


54  INSURANCE  PRINCIPLES  AND  PRACTICES 

disappear  in  a  few  months,  often  through  no  fault  of  the 
owner,  and  that  investments  considered  "gilt-edge"  may  some- 
times involve  the  loss  of  millions.  He  wishes  to  protect  his 
dependents  absolutely,  without  the  chance  of  any  inability  on 
his  part  or  theirs  to  meet  the  premium  payments  of  the  future, 
and  therefore  he  does  not  desire  to  enter  into  a  contract  in- 
volving the  payment  of  premiums  for  a  term  of  years  or  for 
his  lifetime.  Here  is  a  perfectly  definite  situation  which  de- 
mands a  definite  solution  and  obviously  not  every  kind  of  a 
policy  will  meet  his  needs. 

We  find  by  inquiry  that  several  companies  quote  a  rate 
known  as  a  "single  premium."  This  is  exactly  what  its  name 
implies,  and  means  that  for  the  payment  of  one  sum  of  sufficient 
size  a  company  will  assume  all  the  liabilities  of  a  life  insur- 
ance contract  and  will  never  collect  any  additional  sum  from 
the  Insured.  This  meets  the  needs  of  our  hypothetical  but  not 
unique  case.  It  can  readily  be  seen  that  one  premium  of  this 
nature,  which  takes  care  of  the  policy  for  its  entire  duration, 
will  necessarily  be  a  very  large  sum.  Thus,  if  we  examine 
the  rates  of  one  company  we  find  that  at  age  25  the  single 
premium  on  an  ordinary-life  policy  for  $1,000  is  $400,  while 
the  annual  level  premium  on  the  same  policy  is  only  $20.70. 


TABLE  OF  ANNUAL  RATES  ON  VARIOUS  POLICIES  OF  $1,000  EACH, 
AT  DIFFERENT  AGES,  IN  AN  OLD  LINE  MUTUAL  COMPANY. 


S-Year  Re- 

Or 

dinary- 

20-Payment 

Id-Year 

neivable  Term 

Life 

Lifi 

» 

Endoiument 

Age 

Annual 

Single 

Annual 

Single 

Annual 

Single 

20.... 11.60 

18.50 

372.50 

28.10 

372.50 

47.50 

650.00 

25....  12.00 

20.70 

400.00 

30.40 

400.00 

48.10 

651.50 

30.... 12.60 

23.50 

432.50 

33.20 

432.50 

48.80 

654.00 

35. ...13.50 

27.00 

470.00 

36.70 

470.00 

50.00 

657.50 

40....  15.00 

31.70 

513.50 

41.00 

513.50 

51.80 

664.00 

45....  17.60 

38.00 

563.50 

46.50 

563.50 

54.80 

675.50 

50.... 22.50 

46.60 

619.00 

53.80 

619.50 

59.60 

694.00 

55. ...31.10 

58.30 

679.00 

64.00 

679.00 

67.60 

722.50 

60.... 45.50 

74.60 

741.50 

78.30 

744.50 

80.20 

•  •  •   ■ 

It  Is  evident  that  the  advantages  of  the  single-premium 
policy  are : 

1.  The  insured  is  free  from  the  trouble  of  providing  for  the 
payment  of  the  annual  premiums  otherwise  required  for  a 
long  term  of  years  or  for  the  remainder  of  life. 


TYPES  OF  LIFE  INSURANCE  POLICIES       55 

2.  The  insured  has  the  satisfaction  of  knowing  that  his 
object  is  definitely  accomplished  and  that  no  inability  on  his 
part  to  pay  premiums  in  the  future  can  defeat  that  object. 

3.  The  insured  obtains  the  benefit  of  compound  interest  on 
a  large  sum,  which  makes  the  aggregate  which  he  actually  pays 
out  less  than  it  otherwise  would  be. 

4.  If  the  insured  lives  to  an  advanced  age  the  amount  he 
pays  as  a  single  premium  is  less  than  the  total  he  would  have 
paid  In  the  form  of  annual  premiums. 

The  disadvantages  to  the  average  person  of  the  single- 
premium  method,  however,  are  so  great  that  it  Is  seldom  used. 

1.  The  sum  necessary  for  a  single  premium  is  so  large  that 
few  persons  are  willing  and  able  to  pay  it  at  one  time. 

2.  If  the  insured  has  the  sum  necessary  he  may  be  able  to 
earn  a  larger  rate  of  Interest  on  It  than  that  earned  by  the 
insurance  company.  In  doing  so  he  usually  takes  a  greater 
risk,  however. 

3.  If  the  insured  dies  at  an  early  age  he  has  paid  a  very 
great  deal  more  for  protection  than  if  the  premium  were  paid 
annually. 

We  see,  therefore,  that  the  single-premium  method  Is  totally 
unsulted  to  the  circumstances  of  the  great  majority  of  persons 
and  that  It  is  useful  only  to  the  man  of  considerable  means 
who  does  not  wish  to  be  annoyed  by  future  premium  payments. 
This  Is  not  so  slight  an  advantage  as  appears  at  first  sight. 
Many  men  of  wealth  have  become  almost  penniless  and  even 
objects  of  charity  In  their  old  age,  and  at  their  death  have 
seen  their  dependents  left  unprovided  for.  By  the  single-pre- 
mium method  they  might  have  insured  the  future  of  their  de- 
pendents beyond  a  doubt  when  they  were  wealthy  and  well 
able  to  do  so.  Another  Illustration  of  the  use  of  the  single- 
premium  policy  is  found  in  the  case  of  the  wealthy  man  who 
desires  Insurance  for  some  specific  purpose,  such  as  to  meet 
an  Inheritance  tax.  When  he  Is  amply  supplied  with  funds, 
he  can  afford  to  pay  a  single  premium  to  insure  the  payment 
of  this  tax  upon  his  estate.  It  furnishes  also  a  method  by 
which  a  life  insurance  policy  may  be  presented  as  a  gift,  the 
donor  handing  the  recipient  a  full-paid  policy  with  no  obliga- 
tions attached.  It  will  be  noted  that  the  single-premium  pay- 
ment is  particularly  suited  to  the  purchase  of  an  annuity,  the 
insured  "saving"  a  large  sum  immediately  for  the  benefit  of 
assured  periodical  payments  in  the  future.     The  single-prc- 


56  INSURANCE  PRINCIPLES  AND  PRACTICES 

mium  principle  may  be  applied  to  any  of  the  various  kinds  of 
policies  mentioned  hereafter  in  this  chapter. 

Term  insurance. — Turning  now  to  the  other  extreme,  there 
is  the  man  who  needs  insurance  primarily  for  the  protection 
it  affords.  Let  us  imagine  a  young  lawyer  with  fine  prospects 
for  the  future  but  with  heavy  family  responsibilities  and  an 
income  as  yet  very  small.  This  is  the  situation  of  thousands 
of  professional  men  at  some  stage  of  life.  Obviously  the 
single-premium  policy  would  be  unsuited  to  his  circumstances; 
what  he  needs  is  the  maximum  protection  with  the  minimum 
cost.  This  can  be  secured  by  means  of  a  "term"  policy,  which 
is  temporary  insurance  obtainable  for  various  periods.  This 
is  a  contract  by  which  the  insurance  company  promises  to  pay 
a  stipulated  sum  upon  death,  provided  death  occurs  within 
an  agreed-upon  period — one  year,  five  years,  ten  years,  or 
twenty  years.  If  the  insured  outlives  the  period  he  receives 
nothing.  He  pays  simply  for  protection  during  the  agreed- 
upon  period  and  the  policy  contains  practically  no  investment 
or  saving  element.  The  simplest  form  of  term  policy  is  that 
which  is  issued  for  one  year  only  and  is  renewed  annually, 
the  insured  being  charged  the  so-called  "natural-premium," 
based  upon  the  probability  of  death  within  one  year  from  the 
attained  age.  At  the  younger  ages  this  probability  is  very  low, 
resulting  in  the  lowest  annual  cost  of  any  type  of  policy;  but 
In  the  later  ages,  as  the  probability  of  death  increases,  the 
cost  mounts  rapidly.  Thus,  we  find  that  a  company  which 
quotes  a  rate  of  $11.82  for  a  one-year  term  policy  of  $1,000 
at  age  25  charges  $28.63  for  a  similar  policy  issued  at  age 
SS.  The  same  principle  Is'  extended  to  a  five-,  ten-,  or  twenty- 
year  period  and  provides  for  level  premiums  for  the  duration 
of  the  period.  Thus  a  person  takes  out  a  five-year  term  policy 
at  age  25  and  pays  an  annual  premium  of  $12.  When  he 
reaches  age  30,  the  term  of  the  contract  has  expired  and  he 
must  renew  the  protection  If  he  still  has  need  of  It.  The  prem- 
ium for  the  new  five-year  term  policy  at  age  30  Is  $12.60. 
The  Insured  may  continue  to  renew  the  policy  as  long  as  de- 
sired, without  medical  examination,  provided  it  contains  the 
renewable  feature,  but  it  will  be  noted  that  In  the  later  years 
of  life  Its  cost  rises  rapidly,  like  the  natural  premium. 

Let  us  now  assume  the  case  of  a  young  business  man  who 
is  applying  to  a  bank  for  a  loan.  He  is  the  principal  asset 
of  the  business,  and  the  bank  feels  that  without  his  personal 


TYPES  OF  LIFE  INSURANCE  POLICIES       57 

direction  the  other  assets  would  be  of  little  value.  Under  these 
circumstances  the  bank  may,  and  now  frequently  does,  request 
that  it  be  given  the  protection  of  a  life  insurance  policy,  pay- 
able to  the  business.  It  is  evident  that  with  the  repayment 
of  the  loan  the  necessity  for  the  policy  ceases,  and  under 
these  circumstances  term  insurance  furnishes  the  cheapest 
method  of  meeting  the  bank's  wishes. 

At  the  present  time  it  is  not  uncommon  for  business  insti- 
tutions to  finance  the  university  education  of  promising  em- 
ployees. Philanthropic  institutions  also  offer  scholarships  to 
deserving  young  men.  It  is  apparent  that  the  benefit  which  is 
expected  from  the  payment  of  the  tuition  is  incorporated  in  the 
existence  of  the  young  man  and  that  his  death  will  wipe  out  the 
value  created  by  the  education.  A  term  policy  would,  at  small 
cost,  protect  against  the  loss  of  the  tuition  by  premature  death. 

Let  us  consider  the  case  of  a  man  who  has  undertaken  a 
contract  of  purchase  calling  for  periodical  payments,  as  is  the 
case  with  hundreds  of  thousands  of  young  persons  purchas- 
ing homes  through  building  and  loan  associations.  It  is  al- 
ways taken  for  granted  by  such  persons  that  they  will  live  to 
complete  the  payments  and  that  their  dependents  will  be  pro- 
vided with  a  place  in  which  to  live.  A  premature  death  will 
end  these  hopes,  however,  and  this  unfortunate  contingency 
may  be  most  cheaply  protected  against,  or  "hedged,"  by  a 
term  policy  for  a  period  coinciding  with  the  term  of  the  con- 
tract of  purchase  or  mortgage.  Five  per  cent  of  all  policies 
are  of  this  type. 

Summarizing  the  advantages  of  term  insurance,  we  find  that 
they  are  as  follows: 

1.  The  cost  is  small.  An  annual  premium  for  a  five-year 
term  policy  at  age  25  is  $12,  while  an  ordinary-life  policy  at 
this  age  costs  $20.70  annually.  This  Is  because  of  the  absence 
of  any  "saving"  or  "investment"  element  in  the  term  policy. 
Hence,  this  policy  is  ideally  suited  to  the  circumstances  of  the 
young  lawyer  or  physician  who  has  assumed  family  obligations 
upon  a  small  Income. 

2.  It  enables  a  person  to  secure  the  maximum  protection 
for  a  given  sum.  Thus,  assuming  that  the  young  professional 
man  has  $50  a  year  available  for  protection  this  will  buy  him 
only  $2,415  of  ordinary-life  Insurance,  but  $4,166  of  term 
insurance. 

3.  If  the  policy  contains   a  renewable   feature  it  may  be 


58   INSURANCE  PRINCIPLES  AND  PRACTICES 

renewed  from  time  to  time  and  the  protection  continued  as 
long  as  desired,  without  medical  examination.  If  it  contains 
the  convertible  feature  it  may  be  converted  into  some  other 
form  of  policy,  without  medical  examination. 

4.  The  policy  may  be  cancelled  at  any  time  without  loss 
to  the  insured. 

The  disadvantages  of  this  type  of  policy  must  not  be  un- 
der-estimated, however.     They  are  as  follows: 

1.  While  the  cost  is  small,  this  is  because  the  insured  is 
saving  nothing.  Under  the  ordinary-life  policy  the  savings 
of  the  early  years  of  life  are  utilized  to  reduce  the  premiums 
of  the  later  years,  thus  enabling  a  level  premium.  Under 
the  term  plan,  however,  the  premiums  increase  with  age  until 
in  later  life  they  become,  like  the  natural  premium,  prohibitive. 

2.  While  the  insured  gets  the  greatest  amount  of  protection 
for  the  given  sum,  it  is  a  type  of  policy  which  is  peculiarly 
likely  to  lapse.  The  insured  himself  has  nothing  to  look  for- 
ward to  and  it  is  therefore  a  policy  suitable  only  for  the  most 
unselfish  purposes.  Many  persons,  becoming  discouraged  at 
paying  premiums  and  receiving  nothing  but  protection,  dis- 
continue all  insurance. 

3.  While  it  may  be  convertible  into  other  forms  of  insur- 
ance, such  as  ordinary-life,  the  insured  must  pay  the  premium 
for  the  new  form  of  insurance  at  the  attained  age,  and  said 
premium  is  higher  at  the  attained  age  than  it  would  have  been 
if  the  final  form  of  policy  had  been  taken  out  originally.  Thus, 
if  a  young  man  at  age  25  carries  term  insurance  for  fifteen 
years  and  then  converts  it  into  ordinary-life  insurance  he 
pays  a  premium  annually  of  $31.70,  whereas  an  ordinary-life 
policy  taken  out  at  age  25  would  have  cost  only  $20.70  an- 
nually. 

4.  Many  persons  are  disappointed  at  the  end  of  ten  or 
fifteen  years  of  premium  paying  because  they  have  accumulated 
nothing,  forgetting  that  the  premium  is  small  on  a  term  policy 
only  because  it  furnishes  nothing  but  protection  and  that  they 
have  had  the  benefit  of  that  protection  for  the  period. 

5.  If  the  term  policy  does  not  contain  the  renewable  and 
convertible  feature  (which  most  of  them  do),  the  insured 
may  find  himself  without  Insurance  at  a  time  when  he  needs 
It  most,  because  of  inability  to  pass  a  medical  examination. 
This  objection  has  no  force  where  the  renewable  and  convert- 
ible privilege  exists,  as  Is  the  case  with  the  insurance  which  the 


TYPES  OF  LIFE  INSURANCE  POLICIES       59 


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15    20    25    30    35    40   45    50    55    60    65    70    75    80    85   SO    95    (00  YEAR 

United  States  Government  has  provided  for  its  soldiers  and 
sailors.  This  is  a  one-year  renewable  term  policy  on  the  in- 
creasing step-rate  plan  for  a  period  extending  not  more  than 
five  years  after  the  proclamation  of  peace,  during  which 
time  it  is  convertible  into  any  of  six  different  policies  providing 
permanent  protection. 

Ordinary-life. — Next  let  us  consider  the  case  of  the  salaried 
Individual,  such  as  a  teacher.  He  seldom  has  a  sum  of  suffi- 
cient size  at  any  one  time  to  meet  the  cost  of  a  single-premium 
policy  but  the  annual  premium  is  in  all  probability  within  his 
reach.  His  salary  is  paid  at  regular  intervals  and  he  no 
doubt  prefers  to  meet  his  bills  in  the  same  manner.  Moreover, 
his  salary,  although  small,  is  rather  definitely  assured  over  a 
long  period  of  years  and  at  the  end  of  that  period  he  is  some- 
times pensioned.  The  term  policy  is  available  to  him,  but 
he  may  prefer  a  more  permanent  form  of  policy  even  though 
for  a  smaller  amount.  Therefore,  it  is  quite  likely  that  he 
will  take  out  a  "whole"-  or  "ordinary"-life  policy  and  pay  an 
annual  level  premium  as  long  as  he  lives. 


60  INSURANCE  PRINCIPLES  AND  PRACTICES 

If  it  is  desired  the  annual  premium  may  be  broken  into  semi- 
annual or  quarterly  payments  and  in  this  manner  be  adapted 
to  the  needs  of  the  person  who  finds  it  difficult  to  lay  aside 
a  larger  amount.  We  find  that  the  company  which  quotes 
the  rates  given  in  the  table  on  a  preceding  page  will  charge 
$10.70  semi-anually  and  $5.40  quarterly  for  a  $1,000  ordinary- 
life  policy  issued  at  age  25,  as  compared  with  an  annual 
premium  of  $20.70.  This  feature  is  of  course  extended  to  the 
other  types  of  policies  because  it  is  a  well-known  fact  thar 
most  persons  find  it  easier  to  pay  $25  four  times  a  year  than 
four  times  that  amount  once  a  year. 

The  advantages  of  the  ordinary-life  policy  are: 

1.  A  permanent  form  of  policy  is  secured  at  a  reasonable 
cost. 

2.  The  payment  of  the  premium  is  distributed  over  life  in 
accordance,  approximately,  with  the  insured's  earning  power. 

3.  The  policy  combines  protection  with  a  small  degree 
of  saving.  The  insured  may  borrow  on  his  ordinary-life  pol- 
icy, while  on  the  term  policy  he  has  no  accumulation  which 
permits  this  privilege.  He  may  also  withdraw  from  the  con- 
tract and  receive  a  surrender  value,  which  is  lacking  under 
the  term  policy. 

4.  By  the  use  of  the  "dividends"  or  refunds  which  he  may 
expect  in  a  participating  company  he  may  obtain  a  paid-up 
policy  at  about  age  65,  thus  bringing  his  premium  payments  to 
an  end  at  about  the  time  his  income-producing  power  ceases. 

5.  The  insured  obtains  a  greater  amount  of  immediate 
protection  under  the  ordinary-life  policy  than  under  certain 
other  policies  which  require  higher  premiums. 

The  disadvantages  of  this  form  of  policy  are  merely  relative 
when  compared  with  other  forms,  which  accounts  for  its  great 
popularity,  about  S2)  per  cent  of  all  policies  issued  being  of  this 
type. 

1.  Not  as  much  insurance  can  be  purchased  for  a  given 
premium  as  under  the  term  plan. 

2.  The  premiums  must  be  paid  for  a  long  period  and  the 
insured's  earning  power  may  diminish  or  cease. 

3.  The  interest  earned  on  the  saving  or  investment  ele- 
ment is  lower  than  might  be  earned  in  other  ways,  although 
the  factor  of  risk  by  these  other  methods  must  be  considered. 

While  the  whole  or  ordinary-life  policy  will  fit  more  per- 
sons than  any  other  one  policy  because  it  involves  the  lowest 


TYPES  OF  LIFE  INSURANCE  POLICIES       61 

annual  cost  of  any  policy  which  provides  permanent  protection, 
it  is  nevertheless  open  to  the  objection  that  the  insured  may 
outlive  his  earning  power  and  the  payment  of  the  premium 
actually  become  a  hardship.  This  objection  is  met  by  another 
type  known  as  the  "limited-payment"  policy. 


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Limited-payment. — There  are  many  persons  whose  earning 
power  is  limited  to  a  certain  period  of  life,  as,  for  example, 
a  person  whose  work  involves  considerable  activity  or  physical 
effort.  These  individuals  may  be  much  in  need  of  insurance, 
but  a  policy  requiring  life-long  payments  is  undesirable.  Take, 
for  illustration,  an  actor  who  is  twenty-five  years  of  age  and 
whose  present  earnings  are  very  large.  He  figures  that  at 
best  he  cannot  retain  his  skill  and  ability  to  amuse  audiences 
beyond  fifty-five  years  of  age,  and  the  question  arises  in  his 
mind  of  how  to  meet  payments  after  that  time.  The  solu- 
tion of  his  problem  is  a  limited-payment  policy;  either  a 
twenty-  or  thirty-payment  life  exactly  fits  his  needs.  The  an- 
nual level  premium  on  a  twenty-payment  life  policy  for  $1,000. 


62   INSURANCE  PRINCIPLES  AND  PRACTICES 

at  age  25,  according  to  our  table,  is  $30.40,  compared  with 
$20.70  for  the  ordinary-life  contract.  For  a  difference  of  $9.70 
he  makes  certain  that  when  he  reaches  forty-five  years  of  age 
his  insurance  will  be  fully  paid  for  the  balance  of  his  life,  re- 
gardless cf  how  long  he  lives,  and  he  obtains  exactly  the  same 
protection  which  the  ordinary-life  policy  affords.  The  com- 
pany has  collected  a  higher  premium  but  in  return  has  prom- 
ised that  no  more  premiums  shall  be  due  after  a  certain  date, 
no  matter  how  long  the  insured  continues  to  live.     After  the 


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payment  of  the  first  premium  the  proceeds  are  payable  at 
death  if  the  policy  has  not  lapsed.  In  a  later  chapter  it  will 
be  seen  that  all  forms  of  premiums  are  reduced  to  a  mathe- 
matical basis,  one  equivalent  to  the  other,  and  that  the  above 
arrangement  is  a  fair  and  equitable  one  to  all  concerned.  If 
the  Insured  should  be  so  unfortunate  as  to  die  shortly  after 
the  policy  is  issued  he  has,  of  course,  paid  more  for  the  pro- 
tection than  under  the  annual-premium  plan.  On  the  other 
hand,  however,  if  his  life  exceeds  the  usual  span  he  has  paid 


TYPES  OF  LIFE  INSURANCE  POLICIES       eZ 

less  than  under  the  annual  plan.  Thirty  per  cent  of  all  con- 
tracts issued  are  of  the  limited-payment  type. 

Endowments. — We  will  next  consider  the  endowment  pol- 
icy, which  promises  payment  upon  death,  if  this  event  occurs 
within  a  certain  specified  period,  and  also  agrees  to  make  the 
payment  in  case  of  survival  at  the  end  of  the  stipulated 
time.^ 

Naturally  a  policy  that  pays  for  either  death  or  survival 
over  a  designated  number  of  years  will  cost  more  than  one 
which  provides  payment  for  death  only.  Thus,  the  company 
whose  rate  is  $20.70  per  year  for  an  ordinary-life  policy  of 
$1,000  issued  at  age  25,  charges  $48.10«for  a  twenty-year 
endowment  issued  at  the  same  age  for  a  like  amount,  $38  for 
a  twenty-five  year  endowment  and  $31.70  for  a  thirty-year 
endowment.  What  particular  advantage  has  this  policy  to 
justify  a  higher  premium?  An  illustration  may  help  to  make 
this  clear.  If  we  take  the  case  of  a  well-known  New  York 
financier  who  received  an  income  of  $50,000  anually,  but  who 
was  not  able  to  save  any  of  it,  we  can  realize  how  many  per- 
sons with  a  smaller  income  are  frequently  in  a  similar  posi- 
tion. This  gentleman,  one  of  the  ablest  financial  men  of  his 
time,  spent  his  salary  as  rapidly  as  it  flowed  in,  and  all  at- 
tempts to  save  any  of  it  were  futile.  This  worried  him,  as  he 
was  fully  conscious  that  the  time  was  approaching  when  his 
income  would  diminish  and  he  would  have  nothing  laid  aside 
for  the  proverbial  rainy  day.  An  insurance  salesman  sug- 
gested an  endowment  policy  as  a  means  of  saving  his  money 
and  at  the  same  time  providing  family  protection.  The  com- 
bination of  this  protection  and  investment  feature  appealed 
to  him  and  he  v/as  insured  for  $100,000  on  a  twenty-year 
endowment  policy. 

A  situation  with  less  money  involved  is  frequently  encoun- 
tered, particularly  among  younger  men,  and  a  contract  which 
compels  them  to  lay  aside  a  certain  sum  periodically  acts  not 
only  as  an  incentive  to  save  but  actually  forces  thrift  upon 
them. 

To  give  another  illustration  of  the  usefulness  of  an  endow- 
ment, a  person  with  a  small  amount  of  cash  may  safely 
purchase  a  home  with  a  lien  against  it  and  provide  for  the 
retirement  of  the  mortgage  with  an  endowment  policy.  The 
advantage  is  that,  in  event  of  premature  death,  the  proceeds  of 

*  For  sample  policy  see  Appendix  III. 


64  INSURANCE  PRINCIPLES  AND  PRACTICES 

the  policy  will  be  available  immediately  and  prevent  possible 
foreclosure.  If  he  adopts  the  method  of  paying  the  debt  by 
saving  a  certain  amount  each  year  an  untimely  death  may  cut 
this  short,  while  an  endowment  meets  this  contingency  and  the 
sum  is  assured  either  at  death  or  at  the  end  of  the  endowment 
period. 

This  form  of  policy  may  also  be  used  to  excellent  advantage 
by  a  contract  on  the  life  of  a  child  which  will  mature  about  the 
time  he  is  old  enough  to  attend  college.  In  many  cases  this 
is  the  only  means  whereby  an  education  may  be  assured.  Sev- 
eral endowments  maturing  during  each  of  the  several  years 
while  the  son  or  daughter  is  attending  college  would  further 
facilitate  matters.  These  "child"  endowments  may  also  be 
used  to  give  a  young  person  a  financial  start  in  the  world. 
Or  in  the  case  of  the  "long-term"  endowment,  maturing  when 
the  policy-holder  is  from  sixty  to  seventy  years  of  age,  the 
proceeds  may  be  used  to  protect  the  insured  against  the  con- 
sequences of  his  economic  death,  i.e.,  the  loss  of  earning  power. 
This  may  be  done  by  placing  the  fund  in  trust;  or  by  investing 


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TYPES  OF  LIFE  INSURANCE  POLICIES       65 

it  and  using  the  income  from  it;  or  by  using  the  income  and 
a  part  of  the  principal  each  year;  or  better  still,  by  the  pur- 
chase of  an  annuity.  Twenty-year  endowments  form  five  per 
cent  of  all  contracts  issued. 

Annuities. — An  annuity  may  be  defined  as  an  insurance  con- 
tract wherein  the  insurer,  in  consideration  of  a  certain  prem- 
ium, promises  to  pay  a  definite  income  to  the  annuitant.  This 
contract  may  be  purchased  by  a  single  premium  and  the  pay- 
ments by  the  company  will  begin  six  months  or  a  year  later. 
This  is  called  an  "immediate"  annuity.  Or  the  annuity  may 
be  bought  by  annual  level  premiums  over  a  period  of  years  and 
the  company  begin  its  payments  at  the  end  of  this  term  of 
years.  This  is  known  as  a  "deferred"  annuity  and  has  the  ad- 
vantage over  the  preceding  type  that  the  premium  is 
spread  out  over  a  long  period  of  years  and  the  individual  is 
better  able  to  pay  in  this  manner  than  by  one  single  premium. 

The  annuity  policy  may  provide  for  annual,  semi-annual, 
quarterly  or  monthly  payments,  either  for  a  certain  term  of 
years  or  for  the  balance  of  the  life  of  the  annuitant,  depending 
on  the  kind  of  annuity  purchased. 

The  advantages  of  annuities  are:  (1)  a  person  can  make 
sure  of  receiving  an  income  in  old  age;  (2)  he  can  safely 
distribute  an  estate  before  death  by  making  sure  of  a  life 
income  for  himself;  (3)  the  rate  of  return  on  the  money  paid 
to  the  insurance  company  is  very  high  when  the  annuity  is  taken 
out  at  an  advanced  age.  The  objection  to  either  the  immediate 
or  deferred  annuity  is  that  in  case  of  death  all  premiums  are 
considered  fully  earned  by  the  company  and  the  contract  is 
terminated.  This  objection  is  sometimes  removed  by  promising 
that  a  certain  number  of  installments  of  the  annuity  will  be 
paid  even  if  death  occurs  and  in  the  case  of  the  deferred 
annuity  by  providing  that  all  premiums  shall  be  returned  in  such 
event.  Of  course  additions  to  the  premiums  are  necessary  in 
order  to  take  care  of  such  promises. 

Installment  insurance. — Although  most  persons  think  that 
it  is  preferable  to  have  the  proceeds  of  the  policy  payable  in 
a  lump  sum,  it  undoubtedly  would  be  better  for  the  beneficiary 
in  the  majority  of  cases  if  the  policy  were  paid  in  installments. 
The  old  adage  of  the  widow  with  the  proceeds  of  a  life  insur- 
ance policy  being  "a  shining  mark  for  a  mining  shark"  is  just 
as  true  to-day  as  ever.  To  protect  the  widow  against  the  lure 
of  speculation  the  insured  may  obtain  a  policy  providing  that 


66  INSURANCE  PRINCIPLES  AND  PRACTICES 

the  proceeds  will  be  paid  in  ten,  fifteen,  or  twenty  equal  an- 
nual installments.  Many  others  arrangements  may  also  be 
made  with  regard  to  payment  of  the  policy  proceeds.  If  the 
face  of  the  policy  is  $10,000  and  the  proceeds  are  payable  in 
ten  equal  annual  installments,  the  insurance  company  natur- 
ally makes  an  interest  allowance  for  the  sums  thus  retained 
each  year  up  to  the  final  payment.  Therefore,  it  can  afford  to 
make  each  installment  something  more  than  $1,000.  On  the 
other  hand,  the  policy  may  promise  to  pay  the  proceeds  in 
ten  installments  of  $1,000  each,  and  in  that  case  the  face  of 
the  policy  is  not  the  full  $10,000  because  of  the  interest  allow- 
ance. The  installment  method  of  paying  the  proceeds  gives 
rise  to  the  name  "income"  policies,  one  of  the  best  types  of 
insurance  to  make  a  person  realize  the  amount  of  protection 
he  requires.  Suppose  we  take  the  case  of  a  married  man  with 
a  wife,  two  children,  aged  four  and  seven  years,  and  an  in- 
come of  $5,000  per  year.  Granting  that  a  man  uses  one-half 
of  his  income  on  himself,  that  would  still  leave  $2,500  needed 
annually  for  the  rest  of  the  family,  an  income  which  would  be 
brought  to  an  end  by  the  premature  death  of  the  husband. 
A  $5,000  policy  is  often  considered  a  large  amount  of  insur- 
ance, yet  this  would  only  produce,  at  six  per  cent,  an  annual 
income  of  $300,  which  is  ridiculously  inadequate.  The  only 
logical  arrangement  is  to  have  a  policy  producing  an  income 
of  $2,500,  in  order  to  eliminate  the  financial  hardships  that 
the  dependents  might  otherwise  have  to  endure. 

Many  policies  permit  the  installments  to  be  paid  monthly, 
quarterly,  or  semi-annually  as  well  as  annually.  Another 
arrangement  makes  the  installments  certain  for  a  definite  num- 
ber of  years  and  continuous  thereafter  as  long  as  the  benefi- 
ciary may  live.  Necessarily,  on  policies  of  equal  face  values, 
the  installments  paid  under  the  latter  provision  will  be  smaller 
than  in  the  case  where  they  cease  after  a  certain  number  of 
payments  have  been  made.  The  reduction  will  be  in  accord- 
ance with  a  calculation  made  on  the  basis  of  the  probable 
extended  life  of  the  beneficiary,  and  the  longer  this  period, 
the  smaller  will  be  the  installments.  Payment  of  proceeds  by 
means  of  a  "gold  bond"  should  also  be  mentioned.  When 
the  insured  dies,  a  gold  bond  to  run  for  a  definite  period  of 
years  and  bearing  a  stipulated  rate  of  interest  is  issued  to  the 
beneficiary.  This  interest  is  paid  at  specified  times  to  the  bene- 
ficiary and  at  the  maturity  of  the  bond  the  principal  is  paid. 


TYPES  OF  LIFE  INSURANCE  POLICIES       67 

Briefly  summarized,  the  advantages  of  the  installment  pol- 
icy are: 

1.  The  beneficiary  is  protected  against  loss  of  the  proceeds 
through  fraud  or  unwise  investment. 

2.  The  premium  is  smaller  in  proportion  to  the  face  of  the 
policy,  buying  more  in  installments  than  it  could  in  a  lump 
sum. 

3.  If  the  installments  are  continuous,  the  beneficiary  is 
provided  for  as  long  as  he  or  she  lives. 

4.  The  insured  may  make  sure  that  the  beneficiary  will 
receive  at  least  a  certain  amount  by  buying  a  contract  which 
provides  for  a  definite  number  of  payments. 

5.  If  the  payments  extend  over  a  sufficient  period  they 
will  provide  for  the  education  of  the  children. 

6.  The  beneficiary  is  relieved  of  the  trouble  and  expense  of 
managing  the  fund,  the  insurance  company  assuming  this  re- 
sponsibility. 

The  only  disadvantages  connected  with  the  policy  are : 

1.  The  beneficiary  may,  for  some  very  good  reason  not 
foreseen  or  imagined  by  the  insured,  have  need  of  a  lump 
sum  of  money. 

2.  The  beneficiary,  unless  the  policy  provides  for  continu- 
ous installments,  may  outlive  the  installments  provided  for. 

Combinations. — We  have  explained  the  most  common  con- 
tracts in  life  insurance,  but  nearly  all  of  those  mentioned  can 
be  further  adapted  to  particular  circumstances  by  combinations 
of  the  various  features. 

Let  us  take,  for  illustration,  the  case  of  a  young  physician 
aged  twenty-five,  whose  earnings  are  as  yet  small  and  who 
takes  out  a  one-year  renewable  term  policy  on  the  increasing 
step-rate  plan  and  containing  the  conversion  privilege.  This 
seems  to  be  a  good  type  of  policy  for  a  few  years.  Later,  how- 
ever, when  he  is  thirty  years  of  age,  his  earnings  have  increased 
and  he  desires  permanent  protection.  According  to  the  con- 
version privilege,  he  may  choose  from  a  number  of  policies, 
and  the  question  is,  which  meets  his  needs?  Estimating  that 
his  best  earning  period  will  be  between  the  ages  of  thirty  and 
fifty,  he  thinks  a  limited-payment  policy  will  suit  him.  At  the 
same  time  he  realizes  that  when  he  reaches  sixty-five  or 
seventy  he  will  wish  to  retire;  therefore,  he  would  prefer  an 
endowment  maturing  at  that  time,  enabling  him  to  purchase 
an  annuity  or  provide  in  some  other  manner  for  his  declining 


68   INSURANCE  PRINCIPLES  AND  PRACTICES 

years.  So  he  converts  his  term  policy  into  a  twenty-payment 
forty-year  endowment.  This  means  that  he  will  pay  premiums 
from  age  30  to  50  and  at  age  70,  if  he  is  still  living,  the  insur- 
ance company  will  turn  over  to  him  the  proceeds,  although  in 
case  of  death  at  any  time  between  the  writing  of  the  policy  and 
age  seventy  the  policy  will  be  paid  to  the  named  bene- 
ficiary. He  may  also  stipulate  that  in  case  of  his  prior  death  the 
proceeds  shall  be  paid  in  installments  in  accordance  with  any  of 
the  arrangements  mentioned  on  a  previous  page.  There  are 
frequently  other  and  more  complicated  schemes.  This  illus- 
tration is  given  with  a  view  of  showing  a  few  possibilities  of 
combining  various  features  in  a  single  policy,  the  premium 
always  being  adjusted  to  meet  the  requirements  of  the  case. 
In  all  instances  the  insured  receives  exactly  that  for  which  he 
pays.  When  making  comparisons  of  rates  on  different  poli- 
cies of  like  amount  at  the  same  age  the  "guaranteed"  values 
should  always  be  observed  as  well  as  maturity  dates,  because 
the  higher  the  premium,  the  greater  the  loan  and  cash  values. 
A  fuller  description  of  these  relative  values  is  reserved  for 
a  later  chapter. 

Special  contracts. — While  the  foregoing  explains  the  types 
of  policies  that  are  the  most  common,  there  are  nevertheless  a 
great  many  other  varieties  of  a  special  character.  These  may 
be  classified  in  two  groups:  (1)  those  involving  more  than 
one  life  and  (2)  those  that  provide,  by  special  clauses  or  en- 
dorsements, for  some  adjustment  of  premium,  face  value 
or  proceeds.     In  the  first  group  we  have : 

1.  Joint  life. — This  is  a  policy  which  insures  two  or  more 
lives  and  promises  payment  when  the  first  death  occurs.  Its 
only  extensive  use  has  been  by  partnerships,  where  the  mem- 
bers of  a  firm  are  insured  under  one  contract,  the  advantage 
being  a  lower  premium  than  if  each  partner  were  separately 
insured.  When  a  death  occurs  under  such  a  policy  it  expires, 
however,  and  if  protection  is  needed  for  the  remaining  mem- 
bers a  new  one  must  be  secured,  which  may  not  be  possible. 

2.  Last  survivor. — Two  or  more  lives  are  involved  in  this 
policy  but  it  differs  from  the  joint-life  policy  in  that  payment 
is  not  made  until  the  last  member  of  the  group  dies,  instead 
of  the  first. 

3.  Contingent  or  Survivorship. — This  differs  from  the 
previous  policies  in  that  payment  is  made  only  if  a  certain 
person  dies  and  another  continues  to  live.    This  is  of  value  to 


TYPES  OF  LIFE  INSURANCE  POLICIES       69 

protect  a  lender,  where  a  person  by  borrowing  has  anticipated 
his  right  to  an  estate  at  some  future  time,  the  right  to  the 
estate  being  contingent  upon  his  outliving  another  person. 

4.  Last-survivor  annuities. — This  policy  promises  to  pay 
an  annuity  to  two  or  more  persons  as  long  as  they  live.  Should 
death  occur  the  full  amount  will  be  paid  to  the  survivor  or 
survivors  until  all  are  dead.  Ordinarily  not  more  than  two 
lives  are  involved,  usually  a  husband  and  wife. 

5.  Reversionary  Annuity. — The  beneficiary  of  the  policy 
receives  a  life  annuity  if  the  insured  dies  first  but  nothing 
is  paid  and  the  contract  expires  if  the  beneficiary  dies  before 
the  insured.  This  is  really  a  form  of  income  policy  and  makes 
certain  at  low  cost  that  the  beneficiary  will  have  a  life  income 
if  the  insured  is  the  first  to  die. 

The  second  group   of  special  contracts  should  be  divided 
Into  two  sub-groups. 

1.  According  to   adjustment  of  the  premium,  which  may 
be  taken  care  of  by  clauses  providing  for: 

a.  Waiver  of  Premiums. — A  clause  to  the  effect  that  in 
case  of  the  total  and  permanent  disability  of  the  insured  the 
policy  shall  be  considered  full  paid  for  its  face  value  and  no 
more  premiums  required.  Usually  the  disability  must  begin 
before  the  insured  reaches  age  sixty. 

h.  Return  of  Premiums. — A  promise  that  in  case  of  death 
within  a  certain  time  a  part  or  all  of  the  premiums  will  be  re- 
turned in  addition  to  the  payment  of  the  face  of  the  policy. 
This  Is  easily  possible  as  the  cost  of  this  special  feature  has 
been  added  to  the  original  premium. 

c.  Decreasing  Premiums. — The  early  years  of  the  policy 
have  very  high  premiums,  which  offset  the  later  years.  Usually 
these  scale  down  year  after  year  until  no  more  premiums  are 
paid.  In  other  words,  It  Is  a  modification  of  the  limited- 
payment  policy  and  has  practically  the  same  advantages. 

2.  According  to  adjustment  of  the  face  of  the  policy : 

a.  Decreasing  face  value. — These  forms  provide  that 
when  the  Insured  attains  a  certain  age  the  face  of  the  policy 
shall  be  reduced  each  year  by  a  certain  amount  until  a  definite 
face  value  is  reached  which  is  then  considered  paid-up.  This 
type  of  policy  gives  a  greater  amount  of  protection  in  the  years 
when  most  needed  and  gradually  decreases  as  the  necessity  for 
the  insurance  decreases. 

b.  Multiple  indemnity. — Double  the  face  value  Is  some- 


70   INSURANCE  PRINCIPLES  AND  PRACTICES 

times  provided  for  if  death  results  from  an  accident.  A  very 
small  addition  to  the  regular  rate  is  necessary  for  such  a 
"frill." 

c.  Disability. — In  addition  to  the  waiver  of  the  premium 
in  case  of  disability,  it  is  frequently  provided  that  in  case  of  to- 
tal and  permanent  disability  the  proceeds  of  the  policy  shall  be- 
come due  and  payable.  This  is  sometimes  accomplished  by  the 
payment  of  equal  annual  installments  over  a  period  of  years,  in 
which  case  the  face  of  the  policy  is  decreased  by  the  amounts 
so  paid  and  when  death  occurs  only  the  difference  is  payable. 

There  are  other  kinds  of  disability  clauses  which  promise 
an  Income,  and  in  addition  pay  the  full  face  of  the  policy  when 
death  occurs;  but  the  cost  of  such  variations  must  always  be 
included  in  the  premium.^ 

Disability  insurance  is  frequently  written  by  collateral 
contracts  covering  accident  and  health,  and  a  full  description 
of  these  is  given  in  a  later  chapter. 

^  See  disability  clauses  in  Appendices  III  and  IV. 


Chapter  VI 

NET  AND  GROSS  LIFE   INSURANCE  PREMIUMS 

Life  insurance  premiums  and  "cost  of  production." — The 
previous  chapter  has  shown  that  life  insurance  policies,  like 
suits  of  clothes,  must  be  adapted  to  the  different  needs  of 
various  classes  of  persons.  It  is  plain  that  they  are  like  suits 
in  other  respects — there  is  a  diversity  in  character,  length  of 
service^  and  price.  Again,  the  price  charged  for  the  different 
policies  must  be  at  least  sufficient  to  cover  the  cost  of  pro- 
duction and  yet  low  enough  to  compete  with  the  articles  offered 
by  other  sellers.  As  a  consumers'  mutual  association  for 
manufacturing  clothing  sells  goods  at  cost  of  production  plus 
the  expense  of  marketing,  so  a  mutual  life  insurance  company 
sells  its  policies  at  cost  of  production  plus  expenses.  On  the 
other  hand,  the  stock  company,  organized  for  profit  to  the 
stockholders,  is  induced  by  competition  to  meet  the  rates  of 
the  mutual  as  far  as  possible. 

It  is  evident  from  the  foregoing  that  in  life  insurance  (1) 
the  cost  of  production  will  largely  govern  the  premiums 
charged  and  (2)  that  this  cost  of  production  differs  for  va- 
rious types  of  policies.  The  cost  of  production  in  manufac- 
turing corresponds  to  the  "mortality  cost"  in  life  insurance, 
for  the  life   insurance  company  is  selling  protection.      The 

*For  example,  we  find  a  company  quoting  rates  as  follows: 
ANNUAL  PREMIUM  RATES  PER  $1000 


Ordinary 

lO-Pay- 

20-Pay- 

10-Yr. 

20- Yr. 

10-Yr.  Renew- 

Age 

Life 

ment 

ment 

Endoivm't. 

Endoium't. 

able  Term 

20. 

...$18.50 

$45.50 

$28.10 

$100.10 

$47.50 

$11.70 

25. 

...   20.70 

49.10 

30.40 

100.60 

48.10 

12.30 

30. 

.  ..  23.50 

53.40 

33.20 

101.20 

48.80 

13.00 

35. 

...   27.00 

58.50 

36.70 

102.10 

50.00 

14.20 

40. 

. ..   31.70 

64.60 

41.00 

103.30 

51.80 

16.10 

45. 

. ..   38.00 

72.00 

46.50 

105.30 

54.80 

19.80 

50. 

...  46.60 

81.00 

53.80 
71 

108.60 

59.60 

26.30 

72   INSURANCE  PRINCIPLES  AND  PRACTICES 

marketing  or  selling  expense  of  a  manufacturer  is  duplicated 
by  the  "loading"  or  expenses  allowed  in  life  insurance  to  cover 
commissions  to  agents  for  obtaining  the  business,  the  main- 
tenance of  offices,  etc.  A  broad  knowledge  of  any  business 
must  include  a  knowledge  of  its  costs,  prices  and  expenses. 
The  elements  which  enter  into  the  cost  of  insurance  and  its 
selling  expense  will  evidently  throw  considerable  light  upon 
the  operations  of  a  life  insurance  company  and  the  relations 
between  it  and  the  persons  insured.  In  fact,  such  a  considera- 
tion is  absolutely  essential  to  an  intelligent  discussion  of  life 
insurance  problems  or  to  the  efficient  buying  and  selling  of 
life  insurance  protection.  In  this  respect,  also,  insurance  does 
not  differ  from  any  other  commodity,  for  the  salesman  who 
knows  his  goods  is  able  to  sell  more  with  greater  satisfaction 
to  his  customers,  and  the  customer  who  buys  judiciously  is 
more  likely  to  purchase  the  kind  of  commodity  which  meets 
his  requirements. 

Elements  of  cost  in  life  insurance. — The  cost  of  production 
of  the  commodity  life  insurance  includes  mortality  and  ex- 
pense, which  together  determine  the  premium  to  be  charged. 
Let  us  now  consider  the  former.  The  mortality  cost  of  dif- 
ferent types  of  policies  is  primarily  determined  by  the  amounts 
which  the  company  must  pay  out  in  death  claims  on  these 
different  types.  At  this  point  it  Is  Important  to  note  that  life 
insurance  differs  from  other  commodities  in  that  the  price  is 
fixed  and  collected  before  the  goods  are  delivered.  This  has 
two  vital  consequences — (1)  we  must  be  prepared  to  esti- 
mate the  death  claims  before  they  become  due  and  payable, 
and  (2)  since  we  collect  the  price  in  advance  and  have  the  use 
of  the  customer's  money,  wc  must  be  prepared  to  allow  him 
interest.  It  would  be  more  correct,  therefore,  to  say  that  the 
mortality  cost  depends  upon  the  present  value  of  the  expected 
death  claims. 

Mortality  tables. — The  only  way  In  which  we  can  gauge  the 
death  claims  of  the  future  is  by  the  experience  of  the  past. 
Life  insurance  is  based  upon  facts  exhibited  by  past  experience 
and  embodied  in  a  so-called  "mortality  table."  We  assume 
that  history  will  repeat  itself  under  similar  conditions,  and  from 
the  mortality  table,  with  the  assistance  of  the  principle  of  prob- 
ability, we  are  able  to  predict  the  future.  We  cannot  forecast 
the  future  for  a  single  individual  but  we  can  foresee  with 


LIFE  INSURANCE  PREMIUMS  73 

tolerable  accuracy  what  will  happen  to  a  large  group  of  in- 
dividuals. Various  investigations  have  resulted  in  slightly 
different  representations  of  past  facts;  hence  there  are  dif- 
ferent mortality  tables,  the  variations  being  principally  due  to 
the  conditions  under  which  the  facts  were  compiled.  The  two 
most  important  tables  at  present  are  ( 1 )  the  American  Experi- 
ence Table,  based  mainly  upon  the  lives  insured  in  a  large 
American  company,  and  prescribed  by  law  in  many  States  as 
a  basis  of  valuation,  and  (2)  the  National  Fraternal  Con- 
gress Table,  based  upon  the  lives  of  persons  Insured  in  fra- 
ternal organizations.  We  present  on  page  74  the  American 
Experience  Table,  which  will  be  used  in  our  illustrations  in  this 
chapter.  It  will  be  noted  that  this  table  shows  for  each  age 
up  to  and  Including  age  ninety-five  the  number  of  persons  alive 
at  the  beginning  of  the  year  and  the  number  dying  during  the 
year. 

At  age  twenty-five,  for  ex:ample,  out  of  every  89,032  persons, 
718  die  during  the  year  and  before  they  reach  age  twenty-six, 
leaving  88,314  persons  alive  at  the  latter  age.  Similar  In- 
formation is  given  for  every  age.  Although  this  tabic  starts 
for  convenience  with  100,000  lives,  it  might  equally  well  start 
with  any  other  assumed  number.  The  important  fact  shown 
by  the  table  Is  not  the  absolute  number  of  persons  alive  and 
dying,  but  the  ratios  between  those  dying  during  the  year  and 
those  who  began  the  year  alive,  and  between  those  alive  at  the 
beginning  of  various  years.  The  absolute  figures  used  are 
of  no  consequence,  therefore,  so  long  as  they  show  these  ra- 
tios correctly.  The  table  was  not  constructed,  as  a  matter  of 
fact,  by  the  observation  of  100,000  persons  from  age  ttn  to  age 
ninety-six,  but  by  noting  the  percentage  of  persons  aged  twenty- 
five  who  died  In  one  year,  the  percentage  of  persons  aged 
twenty-six  who  died  In  one  year,  etc.,  and  then  applying  these 
various  percentages  to  a  hypothetical  group  of  100,000,  start- 
ing at  age  ten.  By  this  table,  with  the  help  of  the  principle  of 
probability  as  stated,  we  can  predict  the  future. 

Principle  of  probability. — The  principle  of  probability  em- 
ployed may  be  illustrated  by  a  person  rolling  dice.  Each 
die  has  six  sides  with  six  different  numbers  engraved  thereon, 
any  one  of  which  Is  equally  likely  to  come  uppermost  when 
the  die  is  rolled.  What  is  the  chance  that  a  person  will  obtain 
a  four  upon  rolling  a  die?     This  chance  may  be  and  is  com- 


74  INSURANCE  PRINCIPLES  AND  PRACTICES 


AMERICAN  EXPERIENCE  TABLE 
OF   MORTALITY 

At  Number 

Age           Sui'viving  Deaths 

10 100,000  749 

11 99,251  746 

12 98,505  743 

13 97,762  740 

14 97,022  737 

15 96,285  735 

16 95,550  732 

17 94,818  729 

18 94,089  727 

19 93,362  725 

20 92,637  723 

21 91,914  722 

22 91,192  721 

23 90,471  720 

24 89,751  719 

25 89,032  718 

26 88,314  718 

27 87,596  718 

28 86,878  718 

29 86,160  719 

30 85,441  720 

31 84,721  721 

32 84,000  723 

33 83,277  726 

34 82,551  729 

35 81,822  732 

36 81,090  737 

37 80,353  742 

38 79,611  749 

39 78,862  756 

40 78,106  765 

41 77,341  774 

42 76,567  785 

43 75,782  797 

44 74,985  812 

45 74,173  828 

46 73,345  848 

47 72,497  870 

48 -.  .  71,627  896 

49 70,731  927 

50 69,804  962 

51 68,842  1,001 

52 67,841  1,044 

53 66,797  1,091 

54 65,706  1,143 


AMERICAN  EXPERIENCE  TABLE 
OF   MORTALITY 

At  Number 

Age           Surviving  Deaths 

55 64,563  1,199 

56 63,364  1,260 

57 62,104  1,325 

58 60,779  1,394 

59 59,385  1,468 

60 57,917  1,546 

61 56,371  1,628 

62 54,743  1,713 

63 53,030  1,800 

64 51,230  1,889 

65 49,341  1,980 

66 47,361  2,070 

67 45,291  2,158 

68 43,133  2,243 

69 40,890  2,321 

70 38,569  2,391 

71 36,178  2,448 

72 33,730  2,487 

73 31,243  2,505 

74 28,738  2,501 

75 26,237  2,476 

76 23,761  2,431 

77 21,330  2,369 

78 18,961  2,291 

79 16,670  2,196 

80 14,474  2,091 

81 12,383  1,964 

82 10,419  1,816 

83 8,603  1,648 

84 6,955  1,470 

85 5,485  1,292 

86 4,193  1,114 

87 3,079  933 

88 2,146  744 

89 1,402  555 

90 847  385 

91 462  246 

92 216  137 

93 79  58 

94 21  18 

95 3  3 


LIFE  INSURANCE  PREMIUMS  IS 

monly  expressed  by  a  fraction,  of  which  the  number  of  pos- 
sibilities is  the  denominator  and  the  number  of  possibilities 
fulfilling  the  conditions  the  numerator.  The.  chance  in  this 
case  is  therefore,  1/6,  or  one  in  six.  What  is  the  chance  that 
either  a  four  or  five  will  be  shown?  Here  two  possibilities  ful- 
fil the  condition,  and  consequently  the  chance  is  1/6  (the  chance 
of  a  four)  plus  1/6  (the  chance  of  a  five),  or  2/6.  By  apply- 
ing this  idea  to  the  table  we  can  obtain  fractions  indicating 
the  probability  of  dying  or  living,  reasonably  certain  of  fulfil- 
ment because  the  table  is  not  based  upon  theories  or  assump- 
tions but  upon  facts  verified  by  past  experience.  What  Is 
the  probability  that  a  person  aged  twenty-five  will  die  In  one 
year?  If  the  number  of  possibilities  Is  89,032,  that  is  the 
denominator  of  our  fraction,  and  if  past  experience  reflected  by 
the  table  shows  that  718  persons  usually  fulfil  this  condition 
by  dying,  7 1 8  is  the  numerator.  The  probability  of  dying  In  one 
year  is  therefore  718/89,032  at  this  age,  or  about  8/1000. 
What  is  the  chance  that  a  person  aged  twenty-five  will  die 
within  two  years?  It  is  718  plus  718  (the  number  happening 
to  be  the  same  for  the  second  year)  over  89,032  or  1436/ 
89032.  It  might  also  be  expressed  as  718/89032  plus 
718/89032.  The  probability  that  a  person  aged  thirty  will 
die  In  two  years  is  1441/85441.  Any  conceivable  probability 
of  living  or  dying  can  be  calculated  from  this  table,  covering 
one,  two  or  more  lives,  and  this  demonstrates  that  insurance 
is  not  gambling  as  often  supposed,  but  In  fact  is  just  the  oppo- 
site, it  being  possible  to  prognosticate  about  groups  of  lives, 
although  impossible  for  the  individual  life. 

Compound  interest. — A  brief  consideration  of  the  factor  of 
interest  and  we  are  ready  to  calculate  the  mortality  cost  on  the 
different  varieties  of  policies.  In  Insurance  the  price  is  col- 
lected from  the  consumer  in  advance  and  he  must  be  allowed 
interest  by  the  company  for  the  use  of  the  money.  The  as- 
sumption made,  which  Is  not  absolutely  in  accord  with  facts 
but  near  enough  for  all  practical  purposes,  is  that  the  prem- 
ium Is  collected  at  the  beginning  of  the  year  and  the  death 
claims  paid  at  the  end  of  the  year.  As  a  matter  of  fact,  death 
claims  are  usually  paid  a  few  weeks  after  death,  but  as  will 
be  seen  later  this  makes  no  appreciable  difference  to  either 
contracting  party.  It  is  assumed,  then,  that  the  company  has 
the  use  of  the  money  for  a  period  of  time  varying  with  the 
manner  in  which  the  premium  is  paid.     In  order  to  pay  out  ono, 


76   INSURANCE  PRINCIPLES  AND  PRACTICES 

dollar  at  the  end  of  a  year,  therefore,  it  is  only  necessary  for 
the  company  to  collect  at  the  beginning  of  the  year  a  sum 
which,  together  with  interest,  will  equal  one  dollar  by  the 
end  of  the  year.  Since  we  cannot  predict  what  rate  will  be 
earned  by  the  company  on  its  funds  we  must  assume  a  rate 
of  interest,  which  must  be  a  conservative  one,  so  that  the  com- 
pany does  not  anticipate  doing  what  may  later  prove  to  be 
an  impossibility.  The  rate  now  generally  assumed  and  often 
prescribed  by  law  is  three  per  cent.  In  order  to  pay  out  one 
dollar  in  death  claims  at  the  end  of  the  year  it  is  necessary 
for  the  company  to  collect  at  the  beginning  of  the  year  only 
$1.00/1.03  or  $.9708,  because  a  little  figuring  will  show  that 
this  sum  with  interest  at  three  per  cent  will  equal  $1  at  the 
end  of  the  year.  To  be  fair  we  must  allow  the  customer  com- 
pound interest  on  his  money;  that  Is,  if  we  have  the  use  of  his 
money  for  two  years  we  must  allow  him  Interest  on  the  principal 
for  one  year  and  Interest  on  the  principal  plus  interest  for  the 
second  year,  etc.  In  order  to  pay  $1  at  the  end  of  two  years 
it  Is  necessary  for  the  company  to  collect  $1.00/1.0609  or 
$.9425,  $1.0609  being  $1  at  three  per  cent  compound  Interest 
for  two  years.  To  get  the  present  value  of  a  sum  due  at  the 
end  of  any  specified  number  of  years,  therefore,  we  can  either 
divide  It  by  the  amount  of  $1  for  a  term  of  years  at  three 
per  cent  or  multiply  it  by  the  discounted  value  of  $1.  A  com- 
pound interest  and  compound  discount  table  Is  given  below: 

INTEREST  AND  DISCOUNT  TABLE 

Amount  of  $1  due  at  the  Present  luorth  of  $1  due 

end  of  a  term  of  years  at  the  end  of  %  term  of 

Y  ears  at  3  per  cent  years  at  3  per  cent 

1 $1.0300  $.970874 

2 1.0609  .942596 

3 1.0927  .915142 

4 1.1255  .888487 

5 1.1593  .862609 

6 1.1941  .837484 

7 1.2299  .813092 

9 1.2668  .789409 

8 1.3048  .766417 

10 1.3439  .744094 

Natural  premium  (five-year  term  policy) . — We  can  now  as- 
certain how  the  mortality  cost  Is  computed  for  a  five-year  term 
policy  at  age  25,  using  this  simple  type  of  policy  for  the  first 
illustration.     We  will  suppose  that  the  premiums  are  collected 


LIFE  INSURANCE  PREMIUMS  77 

at  the  beginning  of  each  year  and  that  just  enough  is  collected 
to  meet  the  death  claims  of  that  year,  a  system  known  as  the 
"natural  premium  plan."  We  can  foresee  from  the  table  that 
the  company  must  have  at  the  end  of  the  year  $718,000  in 
order  to  pay  $1,000  to  the  beneficiaries  of  each  of  those  who 
die  during  the  year.  But  since  the  premiums  are  collected  at 
the  beginning  of  the  year  the  company  need  acquire  at  that 
time  only  that  sum  which,  together  with  interest,  will  equal 
$718,000  by  the  end  of  the  year.  Dividing  by  $1.03,  the 
amount  of  $1  at  3  per  cent  compound  interest  for  one  year, 
we  reach  the  result  $697,087,374.  This  amount  must  be  col- 
lected at  the  beginning  of  the  year  from  89,032  persons  in- 
sured, so  that  the  amount  from  each  person  is  approximately 
$7.83.  The  second  year  718  persons  will  die,  so  that  at  the 
end  of  that  year  $718,000  must  be  on  hand,  and  $697,087,374 
at  the  beginning  of  the  year  must  be  collected.  But  as  some 
of  the  original  premium  payers  have  died,  at  the  beginning  of 
the  second  year  the  company  can  collect  from  only  88,314  per- 
sons, making  each  person's  contribution  $7.89.  For  the  third 
year  we  require  $718,000;  $697,087,374  must  be  collected  at 
the  beginning  of  the  year  from  87,596  persons,  or  $7.96  per 
person.  For  the  fourth  year  $718,000  is  required  for  death 
claims  which  will  be  furnished  by  $697,087,374  at  the  begin- 
ning of  the  year,  or  $8.02  per  person.  For  the  fifth  year 
$719,000  is  required,  or  $8.10  from  each  person  insured  at 
the  beginning  of  the  year.  The  following  shows  in  tabular 
form  the  amount  necessary  at  the  end  of  each  year  and  to  be 
collected  In  total  and  per  person  at  the  beginning  of  each 
year: 

FIVE  YEAR  TERM  POLICY— NATURAL  PREMIUM  PLAN 

Premium  at  be  gin- 
Total  required  by         Total  necessary      ning  of  each  year 
end  of  year         at  beginning  of  year       per  person 

1st  year $718,000.00  $697,087,374  7.83 

2nd  year 718,000.00  697,087.374  7.89 

3rd  year 718,000.00  697,087.374  7.96 

4th  year 718,000.00  697,087.374  8.02 

5th  year 719,000.00  698,058.247  8.10 

The  following  table  shows  the  natural  premiums  at  various 
ages  on  a  3  per  cent  and  3  ^  per  cent  basis : 


per  cent 

3^  per  cent 

$  7.58 

$  7.54 

7.83 

7.79 

7.89 

7.86 

7.96 

7.92 

8.02 

7.98 

8.10 

8.06 

8.18 

8.14 

8.69 

8.64 

9.S1 

9.46 

10.84 

10.79 

13.38 

13.31 

18.03 

17.94 

25.92 

25.79 

38.96 

38.77 

60.19 

59.90 

91.62 

91.18 

140.26 

139.58 

228.69 

227.59 

78   INSURANCE  PRINCIPLES  AND  PRACTICES 

NET  NATURAL  PREMIUM  TO  INSURE  $1,000  ONE  YEAR 
AMERICAN  EXPERIENCE  TABLE 

Age 

20 
25 
26 
27 
28 
29 
30 
35 
40 
45 
50 
55 
60 
65 
70 
75 
80 
85 

Net  single  premium  (five-year  term  policy). — We  have 
previously  seen  that  there  are  various  ways  of  paying  premiums. 
If  the  above  premiums  had  been  collected  from  each  person  in 
full  at  the  beginning  of  the  five-year  period  (in  the  form  of  a 
"net  single  premium")  it  is  plain  that  the  total  amount  collected 
and  the  amount  collected  per  person  would  be  considerably 
smaller  by  reason  of  ( 1 )  the  extra  interest  earned  for  the 
longer  periods  that  many  of  the  premiums  would  be  on  hand, 
and  (2)  the  fact  that  the  entire  89,032  persons  would  pay 
the  single  premium,  whereas  when  the  premiums  are  paid  an- 
nually the  number  of  premium  payers  is  constantly  being  de- 
creased by  death.  To  calculate  the  cost  per  policy-holder  if 
the  premium  is  paid  in  a  lump  sum  at  the  beginning  of  the 
period,  let  us  refer  again  to  the  table  immediately  preceding. 
For  the  death  claims  due  at  the  end  of  the  first  year,  $697,087 
.374  must  be  collected  at  the  beginning  of  the  five-year  period 
because  the  money  is  in  use  by  the  company  for  one  year.  The 
funds  for  the  second  year's  death  claims,  if  collected  at  the 
beginning  of  the  five-year  period,  will  be  in  the  hands  of  the 
company  for  two  years  and  two  years'  interest  may  be  reckoned 
on.  The  sum  which  will  produce  $718,000  (the  second  year's 
death  claims)  at  3  per  cent  compound  interest  for  two  years, 
is  $718,000  divided  by  $1.0609  ($1  at  compound  interest  for 
two  years)  or  $676,783,856.  To  have  the  third  year's  death 
claims  by  the  end  of  the  third  year,  the  company  need  collect 


LIFE  INSURANCE  PREMIUMS  79 

at  the  beginning  of  the  period  only  $718,000  divided  by 
$1.0927,  or  $657,071,704.  Similar  calculations  for  the  fourth 
and  fifth  year's  death  claim?  are  shown  in  the  table  below : 

FIVE  YEAR  TERM  POLICY— SINGLE  PREMIUM  PLAN 

Total  Amount  necessary  at  Amount 

Death  Claims       the  beginning  of  the  period        per  person 

1st  year $  718,000  $    697,087.374  $7.83 

2d  year 718,000  676,783.856  7.60 

3d  year 718,000  657,071.704  7.38 

4th  year 718,000  637,933.701  7.17 

5th  year 719,000  620,215.748  6.97 

TOTAL $3,591,000  $3,289,092,380  $36.94 

Since  we  collect  this  total  at  the  beginning  of  the  period 
from  every  person  Insured,  a  division  of  the  total  by  89,032 
shows  that  $36.94  per  person  Is  sufficient  to  cover  the  mortal- 
ity cost. 

The  two  plans  of  paying  premiums  we  have  been  discussing, 
the  natural-premium  plan  and  the  single-premium  payment, 
are  not  plans  In  current  use,  because  of  very  apparent  defects. 
The  natural  premium  Is  a  constantly  Increasing  amount,  where- 
as a  person's  earning  power  very  rarely  continues  to  Increase 
Indefinitely.  While  mathematically  quite  feasible  the  plan  Is 
practically  unadaptable  to  most  persons'  needs.  The  single 
premium  is  not  desirable  because  the  insured's  means  do  not 
ordinarily  permit  of  his  paying  the  cost  of  insurance  in  a  lump 
sum.  A  level  or  decreasing  annual  premium  accords  with  the 
needs  of  the  majority  of  persons  but  the  level  or  decreasing 
annual  premium  is  easily  found  from  the  net  single  premium. 
We  will  therefore  continue  to  consider  the  net  single  premium 
for  different  types  of  policies  and  later  translate  these  single 
premiums  Into  practicable  annual  level  premiums. 

Net  single  premium  (whole-life  policy). — The  uses  of  the 
term  policy  are  limited  and  we  will  now  consider  the  whole- 
life  policy,  which  is  much  more  commonly  purchased.  The 
same  method  of  calculation  may  be  used.  Whereas  under  the 
term  policy  the  company  insures  the  person  only  for  a  term  of 
five,  ten  or  fifteen  years,  the  whole-life  contract  insures  the  per- 
son as  long  as  he  lives.  Since  authenticated  instances  of  long- 
evity beyond  96  years  are  extremely  rare,  the  table  stops  at 
age  96.  The  whole-life  policy  may  therefore  be  regarded  as 
a  term  policy  for  the  length  of  life  or  up  to  age  96;  in  fact, 


80  INSURANCE  PRINCIPLES  AND  PRACTICES 

at  age  96  the  policy  should  be  paid  even  if  the  person  is  still 
alive.  The  calculation  of  the  single  premium  on  a  whole  life 
policy  taken  at  age  25  is  shown  in  the  accompanying  table,  only 
a  few  of  the  first  and  concluding  calculations  being  given : 

WHOLE  LIFE  POLICY— NET  SINGLE  PREMIUM  PLAN 

Amount  required 
No.  $1  at  compound      at  beginning 

Year        Age        Dying  Death  Claims       interest   (3%)       of  the  period 

1  25  718  $718,000  $1.0300  $697,087,374 

2  26  718  718,000  1.0609  676,783.856 

3  27  718  718,000  1.0927  657,071.704 

4  28  718  718,000  1.1255  637,933.701 

5  29  719  719,000  1.1593  620,215.748 


etc  etc  etc  etc                          etc  etc 

68  93  58  58,000  7.4632  7,771,465 

69  94  18  18,000  7.6870  2,341,616 

70  95  3  3,000  7.9176  378,903 

71  96  0  0  8.1551 


Total $31,711,417.76 

Dividing  the  total  $31, 711, 41 7. 76  by  the  number  of  persons 
from  whom  it  is  to  be  collected  at  the  beginning  of  the  period, 
89,032,  gives  the  single  premium  per  person  as  $356.18. 

Net  single  premium  (endowment  policy). — ^We  may  now 
consider  the  endowment  policy,  which  promises,  for  example, 
$1,000  upon  death  within  a  stipulated  period,  say  twenty  years, 
or  $1,000  at  the  end  of  the  period  if  the  insured  is  still  alive. 
Two  probabilities  are  involved  here,  the  chance  of  death  and 
the  chance  of  survival.  Some  of  the  insured  will  collect  under 
one  contingency  and  some  under  the  other;  in  either  event  the 
insurance  will  be  paid.  We  can  compute  the  cost  to  the  insur- 
ance company  on  the  persons  who  live  and  the  cost  on  those 
who  die;  the  sum  of  these  is  the  total  cost  of  the  insurance. 
Divided  among  the  people  alive  at  the  beginning  of  the  period, 
the  net  single  premium  for  each  person  is  obtained.  The 
table  on  page  81  shows  the  calculation. 

By  analysis  and  the  application  of  the  same  principles,  the 
net  single  premium  for  any  type  of  policy  may  be  computed. 
A  ten-payment  life  policy  has  the  same  single  premium  as  an 
ordinary  whole-life  policy,  because  the  present  value  of  future 
death  claims  is  the  same,  although  an  annual  premium  paid  only 


LIFE  INSURANCE  PREMIUMS 


81 


DEATH  CLAIMS 


No. 

No. 

Death 

$1 

at  Com- 

Amount  necessary  at 

Ag 

e 

Living 

Dying 

f                 Claims 

■*>ound  interest 

beginning  of  period 

25 

89,032 

718 

$718,000 

$1.0300 

$      697,087.374 

26 

88,314 

718 

718,000 

1.0609 

676,783.856 

27 

87,596 

718 

718,000 

1.0927 

657,071.704 

28 

86,878 

718 

718,000 

1.1255 

637,933.701 

29 

86,160 

719 

719,000 

1.1593 

620,215.748 

30 

85,441 

720 

720,000 

1.1941 

602,988.660 

31 

84,721 

721 

721,000 

1.2299 

586,239.007 

32 

84,000 

723 

723,000 

1.2668 

570,742.909 

33 

83,277 

726 

726,000 

1.3048 

556,418.582 

34 

82,551 

729 

729,000 

1.3439 

542,444.489 

35 

81,822 

732 

732,000 

1.3842 

528,812.398 

36 

81,090 

737 

737,000 

1.4258 

516,917.001 

37 

80,353 

742 

742,000 

1.4685 

505,265.894 

38 

79,611 

749 

749,000 

1.5126 

495,177.239 

39 

78,862 

756 

756,000 

1.5580 

485,247.634 

40 

78,106 

765 

765,000 

1.6047 

476,722.716 

41 

77,341 

774 

774,000 

1.6528 

468,282.732 

42 

76,567 

785 

785,000 

1.7024 

461,104.776 

43 

75,782 

797 

797,000 

1.7535 

454,517.973 

44 

74,985 
'OTALS 

812 

812,000 

1.8061 

449,584.717 

1 

$14,859,000 

$10,989,549,109 

MATURED  ENDOWMENTS 

No. 

Matured             $1  at 

corn- 

Amount  necessary  at 

Age 

Living 

Endovjments        po 

und  interest 

beginning  of  period 

25 

89,032 

45 

74,173 

$74,173,000 

$1.8061 

$41,067,792,146 

SUMMARY 

Present 

No. 

Net  Single 

Value 

Alive 

Premium 

Death 

Claims     .  .  . 

.  ..$10,989,549,109 

89,032 
89,032 

89,032 

123.433 

Ma 

tured  Endowments    . . 

•      •     •  %^  ^  \J  y  ^    \J  ^  *  '^     t    -^   9   ^  \J  ^ 

...  41,067.792.146 

461.270 

$52,057,341,255 

584.703 

ten  times  will  be  greater  than  an  annual  premium  paid  until 
death.  An  annuity  is  paid  to  those  who  live,  so  that  the  cost 
depends  on  those  who  live  through  each  year,  but  otherwise 
the  net  single  premium  is  calculated  in  the  same  manner.  The 
premium  on  a  child's  endowment  is  figured  as  on  other  endow- 
ments, although  if  a  promise  is  made  to  return  the  premiums 
paid  should  the  child  die,  something  must  be  added  to  cover 
the  additional  cost  of  this  feature.  Every  insurance  feature 
costs  something,  but  this  cost  may  always  be  calculated  in 
advance  by  the  principle  of  probability,  the  mortality  table 
and  the  interest. 


82  INSURANCE  PRINCIPLES  AND  PRACTICES 

Annual  premiums. — We  may  now  consider  how  the  single 
premium  is  translated  Into  an  annual  or  limited-payment  pre- 
mium. The  calculation  is  simple.  Divide  the  net  single  pre- 
lum by  the  present  value  of  an  annuity  due  of  $1  at  the  same 
age  for  the  premium-paying  period.  To  explain  the  rule  we 
must  consider  the  nature  of  an  annuity  due  of  $1  a  year.  An 
annuity  due  of  $1  Is  $1  due  at  the  beginning  of  the  year  and  its 
present  value  Is  $1  divided  by  the  amount  of  $1  at  compound 
interest. 

The  net  single  premium  on  the  five-year  term  policy  issued 
at  age  25  we  calculated  to  be  $36.95.  The  appropriate  an- 
nuity due  is  an  annuity  due  of  $1  for  five  years  (the  premium 
paying  period)  beginning  at  age  25.  Its  present  value  would 
be  found  as  follows: 


ge 

Living 

Paid  Each 
Year 

$1 

at  Compound 
Interest 

Present 
Value 

25 

89,032       $1 

$89,032 

$1.00 

$  89,032.000 

26 

88,314         1 

88,314 

1.03 

85,741.747 

27 

87,596         1 

87,596 

1.0609 

82,567.630 

28 

86,878         1 

86,878 

1.0927 

79,505.676 

29 

86,160         1 

86,160 

1.1255 
TOTAL 

76,552.044 
$413,399,097 

Dividing  by  89,032,  the  number  of  persons,  we  get  $4,643 
as  Its  present  value.  The  present  value  of  five  annual  pre- 
miums of  $1  must  be  equal  to  the  net  single  premium,  for  con- 
sidering Interest  and  allowing  for  deaths,  net  single  and  net 
annual  premiums  are  mathematically  equivalent.  The  prop- 
osition may  now  be  stated  thus:  If  a  net  single  premium  of 
$4,643  is  equivalent  to  five  annual  premiums  of  $1,  a  net  single 
premium  of  $36.95  on  a  five-year  term  policy  is  equivalent  to 
five  annual  premiums  of  how  much?  Evidently  the  quotient 
obtained  by  dividing  $4,643  Into  the  net  single  premium 
($36.95),  or  $7.96.  Thus  the  rule  Is  obtained  that  the  net 
annual  level  premium  is  found  by  dividing  the  net  single  pre- 
mium by  the  present  value  of  an  annuity  due.  To  repeat  the 
thought  in  slightly  different  form,  the  net  annual  level  premium 
is  to  the  net  single  premium  as  a  $1  premium  is  to  the  present 
value  of  five  $1   premiums. 


LIFE  INSURANCE  PREMIUMS  83 

Net  annual  level  premium  (?)  $1  annual  level  premium  ($1) 


Net  Single  Premium  ($36.95)  Present  value  of  five  $1  premiums  ($4,643) 


or 


XT  ^  c     ^    n        '        fs-»^nf\   v^  *,       Net  annual  level  premium  (?)   X  Present 
Net  Single  Premium  ($36.95)   X  $1  =  ,        r  ^      «,  •  it±cAi\ 

\  /         -r  value  of  five  $1  premiums  ($4,643) 

or 

N.  S.  P.       ($36.95)    X   $1 

Net  annual  level  premium  ($7.96) 


P.  V.  of  five  $1  premiums  ($4,643) 


In  similar  fashion  we  find  the  present  value  of  a  $1  annuity 
due  for  the  whole  of  life  at  age  25  to  be  $22.1044,  and  divid- 
ing this  into  the  net  single  premium  for  a  whole-life  policy  or 
$356.18  (See  page  80)  we  find  the  net  annual  level  premium 
to  be  $16.11.  Suppose  this  life  policy  was  paid  for  in  ten  an- 
nual payments,  beginning  at  age  25  and  ceasing  after  age  34. 
The  annual  level  premium  for  this  limited-payment  policy 
would  be  found  by  dividing  the  net  single  premium  by  the 
present  value  of  a  ten-year  annuity  due  at  age  25  ($8,484), 
making  the  net  level  premium  $41.98.  For  the  twenty-year 
endowment  at  age  25,  divide  the  net  single  premium  of 
$584.71  by  the  present  value  of  a  twenty-year  annuity  due  of 
$1  at  age  25  ($14,258),  making  the  net  annual  level  premium 
$41.01. 

Expenses  as  an  element  of  cost. — The  annual  premiums 
above  referred  to  are  net  and  include  no  allowance  for 
expenses."  Using  the  net  annual  level  ordinary-life  premium 
as  an  illustration,  the  expense  allowance  may  be  made  by 
adding  a  fixed  amount  to  the  net  premium,  by  adding  to  the 
net  premium  a  percentage  of  itself,  or  by  adding  to  the  net 
premium  both  a  fixed  sum  and  a  percentage  of  the  premium. 
Let  us  see  the  effect  of  each  of  these  methods  and  whether  they 
are  equitable  as  between  ( 1 )  policies  issued  at  different  ages 
and   (2)   expensive  and  inexpensive  policies. 

Applying  the  method  of  adding  a  fixed  sum  to  the  net  pre- 
mium, gross  premiums  are  found  in  the  following  way: 

Whole-Life  Policy,  Age  25  Whole-Life  Policy,  Age  40 

Net  Premium $16.11  $24.75 

Plus  Fixed  Sum 4.03  4.03 


Gross  Premium.  .$20.14  $28.78 

We  see  that  the  loading  on  the  policy  issued  at  age  25  is 
the  same  as  on  the  policy  issued  at  age  40,  but  the  loading  on 

'  For  sample  page  of  ratebook,  showing  gross  rates,  see  Appendix  VI. 


84   INSURANCE  PRINCIPLES  AND  PRACTICES 

the  former  Is  20  per  cent,  of  the  gross  premium,  while  the 
loading  on  the  latter  is  14  per  cent,  of  the  gross  premium.  If 
expenses  do  not  vary  in  proportion  to  the  premium  the  method 
is  equitable;  if  expenses  are  greater  on  a  high-premium  policy 
than  on  a  low-premium  policy,  the  low-premium  policy  is  dis- 
criminated against  by  this  system. 

Let  us  now  examine  the  elements  constituting  the  expenses 
of  a  life  insurance  company.     They  are  as  follows: 

1.  Cost  of  obtaining  new  business:. .  .Principally  consisting  of  the   commission 

paid  the  agent,  which  is  a  percentage  of 
the  premium  in  nearly  every  case. 

2.  Cost   of  collections: ,Tbe  principal  hems  being  the  commissions 

paid  the  agent  for  a  period  of  years  after 
the  first,  usually  a  percentage  of  the  prem- 
ium and  taxes,  which  are  often  a  per- 
centage of  premiums. 

3.  Settlement  expenses: Principally    investigation    of   claims    and 

leffal  expenses.  The  size  of  the  premium 
has  no  effect  on  these ;  but  it  obviously 
costs  more  to  settle  ten  $1,000  claims 
than  one,  and  more  for  a  $10,000  policy 
than  for  a  $1,000  policy. 

4.  General  Expenses: Salaries  and  clerical  expense.     This  var- 

ies with  the  amount  of  business  done ;  it 
may  be  questioned  whether  it  varies  be- 
tween policies  of  different  sizes,  but  cer- 
tainly is  little  affected  by  the  size  of  the 
premium. 

5.  Investment  Expenses: .These  are  taken  care  of  out  of  income  on 

investments  and  so  are  not  a  factor  in 
expense  loading. 

Summarizing,  we  see  that  new  business  and  collection  ex- 
penses vary  with  the  premium,  but  that  general  and  settle- 
ment expenses  vary  with  the  amount  of  the  policy,  irrespective 
of  the  size  of  the  premium.  The  flat  sum  system  of  loading 
would  be  equitable  as  far  as  the  latter  two  elements  are  con- 
cerned, but  would  penalize  unjustly  the  lower-priced  policies 
in  regard  to  the  former  two  elements.  The  percentage 
system  would  be  justified  by  the  former  two  elements  but  not 
by  the  latter.    The  percentage  plan  would  work  out  as  follows : 

WIiole-Life  Policy    2o-Year  Endoivment 
Age  2$  Age  2$ 

Net  Premium   $16.11  $41.01 

Plus  25  per  cent  of  Net  Premium 4.03  10.25 

Gross  Premiums    $20.14  $51.26 


LIFE  INSURANCE  PREMIUMS  85 

It  is  evident  that  equity  will  be  served  only  by  a  combina- 
tion of  the  flat  sum  and  percentage  methods,  each  of  these 
logically  taking  care  of  two  of  the  four  expense  elements. 
This  system  would  be  applied  as  follows: 

Whole-Life  20-Year 

Term  Policy  Endoivment 

Age  25  Age  25  Age  25 

Net   Premium    $7.96  $16.11  $41.01 

Plus   Flat   Sum 2.00  2.00  2.00 

Plus    12^%  of  Net  Premium 1.00  2.01  5.13 

Gross  Premiums    $10.96  $20.12  $48.14 

It  is  seen  that  here  the  loading  increases  as  the  premium 
increases,  but  not  in  the  same  proportion.  A  change  from 
term  to  whole-life  increases  the  premium  102  per  cent  and 
increases  the  loading  only  liZ  per  cent.  The  endowment  net 
premium  is  154  per  cent  greater  than  the  whole-life  premium, 
but  the  loading  on  the  former  is  only  78  per  cent  greater  than 
on  the  latter.  The  diagrams  below  show  ( 1 )  the  gross  pre- 
miums and  loading  under  the  flat  sum  method,  the  former  in- 
creasing and  the  latter  stationary;  (2)  the  gross  premium  and 
loading  under  the  combination  method,  both  increasing,  but 
the  former  faster  than  the  latter. 

In  addition  to  expenses  the  loading  provides  a  margin  for 
certain  contingencies,  such  as  where  the  interest  earned  proves 
less  than  the  estimated  three  per  cent.,  where  the  mortality  ex- 
ceeds that  stated  in  the  mortality  table,  where  losses  occur 
through  the  forfeiture  or  lapse  of  policies,  and  possibly  where 
funds  are  required  to  provide  or  increase  a  dividend. 

Another  problem  connected  with  loading  is  the  difficulty  of 
providing  the  funds  required  for  expenses  at  the  time  they  are 
to  be  spent.  But  the  only  practicable  method  of  so  providing 
Involves  temporary  borrowing  from  the  reserve,  the  discus- 
sion of  which  must  be  postponed  until  we  have  seen  the  object 
and  nature  of  the  latter.  (See  next  chapter).  Regulation 
by  the  State  is  concerned  chiefly  with  this  very  phase  of  the 
subject.  The  law  in  reality  prescribes,  not  the  amount  of 
loading,  for  this  is  regulated  only  by  competition,  but  the 
amount  of  money  collected  for  other  purposes  which  may  be 
borrowed  to  use  for  expenses  during  the  early  period  when  the 
expenses  in  connection  with  a  particular  policy  are  greater  than 
the  amounts  derived  from  the  loading. 


86  INSURANCE  PRINCIPLES  AND  PRACTICES 


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LIFE  INSURANCE  PREMIUMS 


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88   INSURANCE  PRINCIPLES  AND  PRACTICES 

In  some  States  laws  have  been  passed  to  regulate  the  ex- 
travagant race  for  new  business  in  which  some  companies  would 
otherwise  be  impelled  to  engage,  entailing  excessive  commis- 
sions and  expensive  advertising.  In  New  Yorlc,  for  example, 
this  regulation  was  attempted  by  a  law  providing  that  increased 
amounts  of  insurance  must  be  acquired  at  a  decreasing  rate  of 
expense  and  new  business  became  more  and  more  difficult  to 
secure. 


Chapter  VII 

RESERVES,  SURRENDER  VALUES  AND  LOANS 

Reserves,  surrender  values  and  policy  loans. — These  may 
well  be  considered  in  the  same  chapter  because  of  their  com- 
mon origin  and  interrelations.  The  reserve  is  a  fund  that 
grows  out  of  the  premiums  paid.  The  amount  of  this  fund 
at  any  time  depends  on  (1)  the  kind  of  policy,  (2)  the  face 
of  the  policy,  (3)  the  age  of  the  insured  at  issuance,  (4)  the 
length  of  time  the  policy  has  been  in  force,  and  (5)  the  rate 
of  interest  assumed  by  the  company.  The  amount  of  the  sur- 
render value  differs  from  the  reserve  only  to  the  extent  of  a 
small  surrender  charge,  made  to  meet  the  expenses  incidental  to 
the  surrendering  of  the  policy.  The  policy  loan  value  is  usually 
the  same  as  the  cash  surrender  value  except  that  in  place  of  a 
surrender  charge  the  loan  bears  a  stipulated  rate  of  interest. 

Effect  of  different  kinds  of  premiums  on  the  reserve. — 
In  order  that  the  reserve  may  be  clearly  understood,  a  review 
of  the  different  kinds  of  premiums  is  necessary.  Life  insurance 
may  be  purchased  by  natural,  single,  level  or  decreasing  pre- 
miums. The  natural  premium  is  based  on  the  mortality  cost 
for  one  year  at  the  age  concerned  and,  with  interest,  is  just 
sufficient  to  meet  all  death  claims  at  the  end  of  the  year  if  the 
actual  experience  is  the  same  as  the  expected  experience.  With 
increasing  age  the  probability  of  dying  becomes  greater  and 
the  natural  premiums  must  be  increased  to  meet  the  larger 
number  of  death  claims  that  will  have  to  be  paid,  as  shown  on 
page  78.  The  increase  is  not  uniform  each  year  but  is 
constantly  accelerated  until  in  the  older  ages  it  results  in  a 
premium  that  is  prohibitive  and  impractical.  This  way  of 
charging  premiums  is  most  frequently  used  in  connection  with 
the  one-year  renewable-term  plan,  which  has  an  increasing 
step-rate  premium.  Since  the  sum  on  hand  at  the  end  of  each 
year  is  sufficient  to  meet  only  the  maturing  policies  there  is  no 
fund  placed  in  reserve. 

The  single  premium  is  exactly  what  its  name  implies,  one 
premium  of  an  amount  which,  when  compounded  at  the  as- 
sumed rate  of  interest,  will  be  sufficient  to  meet  all  the  losses 
and  expenses  that  will  ever  be  charged  against  the  policy.    One 

g9 


90  INSURANCE  PRINCIPLES  AND  PRACTICES 

lump  sum  thus  paid  has  to  be  so  large  that  it  is  even  more 
impractical  than  the  former  method  and,  therefore,  is  rarely 
used.     (See  page  54) 

When  the  same  amount  is  deposited  with  the  company  each 
year  during  the  premium-paying  period  of  the  policy  we  have 
what  is  called  a  level  premium.  This  method  is  superior  to 
either  of  the  former  because  the  premium  is  moderate  and  is 
never  increased.  The  policy-holder,  it  will  be  noted,  pays  to 
the  company  a  larger  sum  in  the  earlier  years  than  is  necessary 
to  pay  mortality  costs.  This  difference,  with  compound  inter- 
est, goes  into  a  fund  known  as  the  reserve  and  takes  care  of 
the  later  years  when  the  mortality  cost  has  risen  to  exceed  the 
amount  of  the  level  premium  but  at  an  age  when  a  natural  pre- 
mium, as  we  have  seen,  would  be  so  high  as  to  be  unattractive 
and  almost  impossible  to  collect.  It  is  this  level-premium  idea, 
variously  applied,  which  makes  possible  the  many  types  of  poli- 
cies that  are  written.  Under  the  decreasing-premium  plan, 
which  has  never  attained  great  popularity,  the  premium  paid 
decreases  with  advancing  age  and  the  anticipated  decline  of  the 
policy-holder's  earning  power. 

It  can  be  seen  from  this  that  a  reserve  will  accumu- 
late only  under  the  single,  level  and  decreasing  premium 
plans,  because  under  the  natural-premium  plan,  while  some 
infinitesimal  reserve  may  exist  during  the  year,  at  the  end  of 
the  year  it  Is  exhausted  by  the  death  claims.  In  the  case  of 
a  single  premium  the  sum  is  Increased  each  year  by  the  interest, 
and  then  from  this  total  the  current  mortality  cost  Is  deducted. 
The  remainder  is  the  reserve.  This  process  Is  repeated  year 
after  year,  the  factor  of  Interest  making  the  reserve  per  policy 
grow  larger  and  more  rapidly,  as  shown  in  Table  II. 

The  reserve  per  policy  under  the  level  premium  plan  Is  not 
so  large  at  first,  in  actual  amount,  as  under  the  single-premium 
plan,  but  grows  with  greater  speed  than  the  single-premium  re- 
serve, because  it  Is  Increased  each  year,  not  only  by  the  inter- 
est but  also  by  the  amount  of  the  level  premium,  although  re- 
duced each  year  by  its  share  of  the  matured  policy  claims. 

The  reserve  on  a  group  of  policies  and  also  on  the  individual 
policy  on  the  ordinary-life  plan,  where  premiums  are  paid  for 
the  whole  of  life,  taken  at  age  21,  is  Illustrated  in  Table  I, 
where  Its  operation  may  be  traced. 

It  was  assumed  In  this  case  that  there  were  91,914  persons 
Insured  on  the  ordinary-life  plan  at  age  21,  for  $1,000  each, 


SURRENDER  VALUES  AND  LOANS 


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92  INSURANCE  PRINCIPLES  AND  PRACTICES 

the  net  annual  level  premium  at  that  age  being  $13.7725,  ac- 
cording to  the  American  Experience  Table,  and  S^^  per  cent. 
Since  the  assumption  is  that  all  premiums  are  paid  at  the  begin- 
ning of  the  year,  we  have  total  premiums  collected:  91,914X 
$13.7725,  or  $1,265,885,565.  At  3j^  per  cent  interest  this 
amounts  to  $1,310,191,559  at  the  end  of  the  year.  However, 
722  persons  have  died,  and  for  calculation  purposes  it  is  as- 
sumed that  all  claims  are  paid  at  the  end  of  the  year.  There- 
fore, $722,000  is  deducted  from  the  above  total  and  we  have 
$588,191,559  remaining.  Since  we  began  with  91,914  per- 
sons and  722  died  during  the  year  there  are  only  91,192  sur- 
vivors. The  sum  now  on  hand  belongs  to  these  individuals, 
or  approximately  $6.45  per  policy-holder. 

The  second  year  of  the  business  91,192  persons  paid 
$13.7725  each,  or  $1,255,941.82.  There  was  a  reserve  of 
$588,191,559  from  the  previous  year,  therefore  the  total  on 
hand  to  start  the  new  year  is  $1,844,133.38,  and  3  ^^^  per  cent 
interest  is  earned  on  this  amount.  Since  721  die  this  year, 
only  $721,000  will  be  deducted  at  the  end  of -the  year,  the 
remainder  belonging  to  the  surviving  policy-holders.  This  op- 
eration is  repeated  year  after  year  in  the  same  manner  until 
age  96  Is  reached,  always  keeping  in  mind  the  changing  yearly 
mortality  rate.  While  Table  I  shows  the  process  by  which  the 
individual  reserve  grows,  Table  II  shows  the  reserve  increas- 
ing on  individual  policies  of  different  types,  the  principle  of 
obtaining  them  being  the  same  as  in  Table  I. 

TABLE  II— INDIVIDUAL  TERMINAL  RESERVES  ON  DIFFERENT  KINDS 

OF  POLICIES 

Amount  of  Insurance  $1,000.    Age  21.    American  Experience  Table  of 

Mortality  and  3^  per  cent. 

Whole-Life 

Year  of          Whole-Life  Net          Annual  2o-Payment            20-Year 

Insurance      Single  Premium       Premiums  Life               Endoivment 

1 $293.99                       $6.45  $14.05                     $32.71 

2 298.73                        13.13  28.65                        66.78 

3 303.65                       20.04  43.84                    102.28 

4 308.73                        27.21  59.64                      139.27 

5 314.01                       34.63  76.07                     177.82 

10 343.28                        75.82  168.60                      396.43 

15 377.95                      124.61  281.29                      666.00 

20 418.69                     181.94  418.69                  1,000.00 

25 466.00                    248.52  466.00 

30 519.67                     324.05  519.67 

40 639.24                    492.31  639.24 

60 859.40                    802.15  859.40 

75 1,0c  "00                  1,000.00  1,000.00 


SURRENDER  VALUES  AND  LOANS 


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94  INSURANCE  PRINCIPLES  AND  PRACTICES 

Effect  of  interest  rate  on  the  reserve. — Another  factor 
affecting  the  size  of  the  reserve  is  the  rate  of  interest  assumed 
by  the  company.  The  higher  the  rate  of  interest,  the  less  it 
will  be  necessary  to  collect  in  the  form  of  premiums  because 
the  interest  will  make  up  the  difference.  Since  the  premiums 
and  the  reserve  vary  inversely  with  the  interest  rate,  the  higher 
the  interest  assumption,  the  lower  the  reserve  and  the  premium, 
and  vice-versa.  Thus  where  the  interest  rate  is  3  per  cent, 
the  reserve  at  the  end  of  the  fifth  year  on  an  ordinary  life 
policy  issued  at  age  21  Is  $39.20.  If  3^/2  per  cent  is  the  rate, 
the  reserve  would  be  $34.63,  and  if  4  per  cent  the  reserve 
would  be  $30.60.  A  comparison  of  the  reserves  on  these  dif- 
ferent assumptions  is  shown  in  Table  III.  It  might  be  men- 
tioned that  the  net  level  premiums  on  an  ordinary-life  policy 
issued  at  this  age  would  be  $14.72  when  a  3  per  cent  table  is 
used,  $13.77  at  3^/^  per  cent,  and  $13.24  at  4  per  cent. 


TABLE  III— COMPARISON  OF  TERMINAL  RESERVES  ON  ORDINARY- 
LIFE  POLICIES  OF  $1,000  EACH  AT  AGE  21 

American  Experience  Table  of  Mortality  and  Different  Interest  Rates 

End  of  Policy  Year  3  Per  Cent  sYz  Per  Cent  4  Per  Cent 

1 $7.36  $6.45  $5.65 

2 14.95  13.13  11.53 

3 22.79  20.04  17.64 

4 30.86  27.21  23.99 

5 39.20  34.63  30.60 

10 84.91  75.82  67.70 

15 138.00  124.61  112.51 

20 199.17  181.94  166.17 

30 346.53  324.05  302.92 

40 515.49  492.31  470.02 

60 815.47  802.15  788.80 

75 1,000.00  1,000.00  1,000.00 

This  difference  in  interest  assumptions  is  frequently  lost  sight 
of  in  making  comparisons  between  the  reserves,  surrender 
values  and  loan  values  of  different  companies.  Since  these  de- 
pend on  the  assumed  rate  of  interest,  fair  comparisons  are 
obviously  made  only  where  similar  assumptions  prevail.  It  is 
also  evident  that  in  a  mutual  company  the  reserve  basis  makes 
little  difference  to  policy-holders  collectively  because,  while  a 
higher  assumed  interest  rate  enables  lower  premiums,  other 
factors  being  equal,  it  Implies  the  probability  of  smaller 
dividends. 


SURRENDER  VALUES  AND  LOANS  95 

Size  and  importance  of  the  reserve. — This  important  fund, 
the  reserve,  is  the  backbone  of  the  level-premium  plan,  although 
it  has  been  the  subject  of  attack  by  individuals  and  organiza- 
tions who  do  not  believe  in  a  scientific  method  of  conducting 
an  insurance  company  and  who  see  no  reason  for  piling  up  a 
huge  sum  to  take  care  of  the  future.  State  regulation  has  been 
necessary  to  safeguard  it  as  a  trust  fund  and  to  prevent  its 
misuse,  as  it  will  be  needed  in  the  future  to  pay  claims.  If  it 
were  not  for  this  supervision  by  the  States  many  irregularities 
would  follow,  with  consequent  loss  to  beneficiaries.  It  can  be 
seen  that  when  a  State  charters  or  licenses  a  company  to  operate 
within  its  borders  it  must  also  supervise  it,  and  In  order  to  ac- 
complish this  the  States  require  the  insurance  companies  to  file 
periodical  reports  with  a  designated  public  official,  so  that  he 
can  determine  whether  the  company  is  being  safely  operated  or 
not.  A  company  to  be  solvent  must  at  all  times  have  enough  in 
the  reserve  so  that,  supplemented  by  future  premiums,  it  will 
be  able  to  meet  all  future  claims.  A  reserve  sufficient  to  do 
this  is  also  necessary  in  case  a  company  wishes  to  go  out  of 
business  and  have  its  policies  reinsured  by  another  company. 

The  possession  of  this  reserve  makes  life  Insurance  com- 
panies important  factors  In  the  financial  world.  If  the  sums 
held  as  reserve  by  all  life  Insurance  companies  were  totaled 
they  would  reach  nearly  five  billion  dollars  and  any  business 
that  has  at  Its  disposal  an  amount  of  money  as  large  as  this 
necessarily  exerts  considerable  financial  influence.  This  re- 
serve must  be  Invested  safely  for  the  policy-holders  In  order 
that  the  assumed  rate  of  Interest  may  be  earned  and  recogniz- 
ing the  character  of  the  reserve  the  laws  of  the  States  have  re- 
stricted the  types  of  investments  which  may  be  made  with  this 
fund.  Consequently,  the  bulk  of  It  is  invested  in  bonds  and 
mortgages. 

A  better  Idea  of  the  Importance  of  the  reserve  in  a  life  in- 
surance company  may  be  gained  by  comparing  the  amount  of 
the  reserve  with  the  admitted  assets.  A  recent  balance  sheet 
of  one  of  the  oldest  and  most  reliable  mutual  companies  is 
given  below.  Note  that  over  four-fifths  of  Its  total  admitted 
assets  belongs  to  the  policy-holders  and  is  kept  by  the  company 
In  the  form  of  reserve.  This  balance  sheet  will  also  serve  to 
show  the  conservative  nature  of  the  securities  in  which  the  re- 
serve Is  Invested.  The  Item  "Legal  Reserve"  Is  down  as  a 
liability,  the  company  recognizing  that  It  Is  not  their  property 


96   INSURANCE  PRINCIPLES  AND  PRACTICES 

but  that  of  the  insured.  Observe  also  other  items  such  as  "Con- 
tingency  Reserve"  and  "Dividends  Payable"  which  are  held  for 
the  policy  holders. 

BALANCE  SHEET 

Assets : 

Real  estate   (Including  home  office) $4,111,455.84 

Loans  on  real  estate  mortgages 199,503,024.62 

Loans  on  policies  as  collateral 57,501,322.88 

Premium  notes  and  automatic  premium  loans 1,602,310.60 

Premiums   deferred   under   Soldiers'    and    Sailors'    Civil 

Relief  Act 8,509.25 

U.  S.  A.  Bonds,  amortized  value 33,085,979.02 

U.  S.  A.  Certificates  of  Indebtedness 11,850,000.00 

Other  bonds,  amortized  value 118,494,169.20 

Stocks,   market   value 291,811.00 

Cash  on  hand  and  in  banks 2,005,322.11 

Interest  and  rents  due  and  accrued 6,753,525.71 

Due    and    deferred    premiums... 5,778,040.30 

Assets   not   admitted — deducted l22,6g4.'jB 

Total  admitted  assets $440,861,775.75 


Liabilities : 

Reserve   required  by  law  to  be  held  on  the  company's 

policies    $387,890,303.00 

Reserve  for  annuities  and  special  contracts 2,417,236.00 

Present  value  of  not  due  installments 8,879,745.00 

^Losses  and  endowments,  unadjusted,  etc 1,529,498.06 

Estimated  amount  of  taxes  payable  in  1920 1,468,432.47 

Unpaid  accounts,  medical  fees,  commissions,  etc 284,761.39 

Dividends  due  and  in  course  of  payment 1,033,985.97 

Deferred  dividends  payable   in   1920 182,510.48 

Funds  for  deferred  dividends  payable  after  1920 828,322.00 

Annual   dividends   payable    in    1920 16,100,000.00 

Reserve  for  taxes  in  dispute 500,000.00 

Reserved  for  contingencies 19,746,981.38 

Total    liabilities    $440,861,775.75 

*  Figures   include  $989,404.91    for   death   losses   incurred   of  which    no   proofs 
have  been  received. 


A  statement  of  the  income  and  disbursements  of  the  same 
company  for  the  same  year,  is  given  below.  Only  15  per  cent 
of  the  total  income  for  the  year  was  spent  for  operation.  This 
contrasts  sharply  with  industrial  corporations,  where  the  cost 
of  operation  is  usually  at  least  85  per  cent  of  the  income.  This, 
of  course,  is  due  to  the  very  nature  of  the  life  insurance  busi- 
ness. 


■D 


SURRENDER  VALUES  AND  LOANS  97 

STATEMENT  OF   INCOME   AND   DISBURSEMENTS 

Income: 
remiums    $64,693,729.07 


Interest    20,156,307.29 

Rents   363,488.52 

Consideration  for  installment  and  option  settlements.  . . .  2,017,920.35 

All  other  income «. .  331,272.48 

Total  income $87,562,717.71 

Disbursements: 

Death  claims  $19,171,216.98 

Matured  endowments 8,157,265.48 

Annuities    254,811.34 

Surrendered  policies   6,529,618.52 

Dividends  to  policy-holders 14,726,708.36 

Disability  claims 797.56 

Total  paid  policy-holders $48,840,418.24 

Taxes  1,766,887.09 

Commissions  to  agents 7,936,549.38 

Medical   examinations,   etc 413,763.43 

Salaries  of  officers,  trustees,  and  home  office  employees  1,135,683.43 

Rent  for  occupancy  of  home  office 270,000.00 

All  other  disbursements 2,000,762.55 

Total  disbursements   $62,364,064.12 

From  the  standpoint  of  the  individual  policy-holder  the  re- 
serve is  his  savings  fund  on  which  he  is  receiving  interest.  If 
he  needs  cash  it  is  the  basis  of  the  sum  he  may  borrow  or  re- 
ceive as  a  cash  surrender  value  from  the  company;  if  he  lapses, 
it  may  be  used  to  purchase  paid-up  insurance,  or  extended  insur- 
ance; if  he  wishes  to  convert  the  policy,  it  determines  the  addi- 
tional amount  he  will  have  to  pay,  in  the  form  of  a  premium, 
or  how  much  will  be  returned  to  him,  depending  upon  whether 
the  conversion  is  to  a  policy  with  a  higher  or  lower  premium. 
Just  how  rapidly  this  fund  increases  was  illustrated  in  Table  II, 
which  shows  the  terminal  reserve  on  individual  policies. 

Calculation  of  the  reserve. — There  are  several  ways  of  cal- 
culating the  reserve  of  an  insurance  company,  the  most  com- 
mon being  known  as  the  prospective  method.  It  is  this  system 
that  is  used  by  the  States  in  order  to  ascertain  solvency.  It  is 
necessary  to  assume  a  mortality  table  and  also  an  expected 
rate  of  interest,  the  American  Experience  Table  of  Mortality 
is  the  one  generally  employed  and' three  and  one-half  per  cent 
is  the  usual  interest  rate  assumption.  Taking  these  as  the  bases 
of  calculation,  the  present  value  of  all  future  death  claims  Is 


98  INSURANCE  PRINCIPLES  AND  PRACTICES 

estimated.  This  will  be  recognized  as  exactly  the  same  as  the 
total  of  the  net  single  premiums  on  all  the  policies  at  the  at- 
tained ages,  and  from  this  sum  is  deducted  the  present  value 
of  all  future  premium  payments.  The  result  is  known  as  the 
prospective  reserve.  And  possibly  here  is  the  best  point  at 
which  to  give  a  definition  of  the  legal  or  required  reserve.  It 
is  that  amount  which,  if  added  to  the  present  value  of  future 
premium  payments,  will  equal  the  present  value  of  future  death 
claims.  Anticipating  what  will  happen,  regardless  of  what 
has  happened,  it  is  called  the  prospective  reserve.  In  the  form 
of  an  equation,  it  may  be  expressed  as: 

Reserve  -f- Future  Premiums  =  Future  Death  Claims 
or,  transposing  terms, 

Reserve  =  Future  Death  Claims  —  Future  Premiums,  which,   allowing 
for  interest  to  be  earned,  becomes 

_  JPresent  Value  of  ]   [Present  Value  of  ] 

Reserve—     ^p^ture   Death   Claims]  (Future    Premiums] 

For  illustration  purposes  suppose  that  it  is  desired  to  find 
the  net  terminal  reserve  at  end  of  age  93  on  a  whole  life  policy 
issued  at  age  21.  The  present  value  of  the  future  death  claims 
at  the  end  of  age  93  is  found  to  be 

Age  No.  Dying       Death  Claims         Present  Value  Per  Policy 

94 18  18,000  17,391.29| 

95 3  3,000  2,800.50]  voi-^^ 

The  present  value  of  the  future  premiums  is  found  to  be 

Age  No.  Living         Premiums  Present  Value        Per  Policy 

95 3         41.31         39.91]  - 

94 21        289.17        289.171 

The  difference  between  $961.52  and  $15.67,  or  $945.85,  is 
the  reserve.  A  less  tedious  operation  is  possible.  The  present 
value  of  future  premiums  will  be  recognized  as  equal  to  the  net 
single  premium  at  age  94,  since  this  is  the  amount  which  with 
interest  would  cover  such  claims.  The  present  value  of  future 
premiums  of  one  dollar  is  the  present  value  of  an  annuity  due, 
or  at  this  age,  $1.1380,  and  since  we  know  the  net  annual  level 
premium  on  this  policy  to  be  $13.77  we  multiply  the  present 
value  of  an  annuity  due  of  $1  or  $1.1380  by  $13.77,  giving  the 
present  value  of  future  premiums  as  $15.67.  This,  deducted 
from  the  present  value  of  future  death  claims   (which  are  al- 


SURRENDER  VALUES  AND  LOANS  99 

ways  equivalent  to  the  net  single  premium  at  the  attained  age) 
gives  the  reserve  as  $945.85. 

In  the  form  of  an  equation,  it  will  appear  as: 

_                   (Net   Single   Premium)        (Present  Value  of  ..  Net  Annual   Level) 
Reserve  =-^      „.  „..„•„ j  „„„      }  —  {  <t, :...  j..„  X  ^ 


}- 


I       at  attained  age       j        |  $1  annuity  due  Premium  j 

The  net  single  premium  at  age  94  is  $961.52  and  the  pres- 
ent value  of  an  annuity  due  of  $1  at  that  age  is  $1,138.  Since 
$13.77  is  the  lev^el  premium  on  the  policy  which  was  taken  at 
age  21,  the  reserve  at  94  is  $961.52— ($1.138X$13.77)  or 
$945.85. 

If  the  amount  held  as  reserve  by  the  company  is  equal  to,  or 
more  than,  the  sum  mentioned  as  "that  sum"  in  the  definition, 
then  the  company  is  solvent.  Less  than  that,  however,  means 
that  the  company  is  insolvent  and  that  it  is  time  for  the  State 
to  adjust  its  affairs,  because  at  the  present  rate  it  will  not  have 
sufficient   on   hand   to  meet   its    future   liabilities. 

Another  way  of  looking  at  the  reserve  is  as  surplus  premiums 
collected,  the  operation  of  the  method  being  shown  in  Table  I. 
It  is  known  as  the  "retrospective  reserve,"  because  it  is  found 
by  looking  back  over  the  results  of  the  past.  To  calculate  this 
reserve  it  is  merely  necessary  to  find  the  past  premiums  col- 
lected plus  interest  thereon  and  substract  from  that  past  death 
claims.  The  resulting  amount  will  be  the  actual  amount  on 
hand. 

Expressed  in  the  form  of  an  equation  :- 

(Past    Premiums)  (Past  Death  Claims) 

I  with    Interest  \        \      with    Interest      j    —■'Reserve 

Obviously,  if  the  premiums  are  Improperly  small  or  the 
claims  unusually  large  the  reserve  will  be  inadequate  and  below 
the  sum  reached  by  the  prospective  method.  The  latter  is  su- 
perior in  that,  regardless  of  what  has  happened,  it  stipulates 
the  sum  required  to  meet  future  conditions. 

The  application  of  the  prospective  reserve  principle  to 
the  actual  or  retrospective  reserve  tests  its  adequacy.  If 
the  actual  experience  and  the  expected  are  the  same,  then  the 
prospective  and  retrospective  reserve  will  coincide.  Let  us 
test  the  reserve  as  shown  in  Table  I  at  the  end  of  the  third  year 
by  the  prospective  method.  The  retrospective  reserve  of  $20. 
04  should  be  "that  amount"  which  if  added  to  future  premiums 
will  equal  future  death  claims.     The  present  value  of  future 


100    INSURANCE  PRINCIPLES  AND  PRACTICES 

death  claims  at  age  24  is  $303.6499,  which  is  the  same  as  the 
net  single  premium  at  that  age.  There  are  89,751  in  the  group; 
therefore,  the  total  of  the  net  single  premiums  would  be  $27, 
252,882.1749.  The  present  value  of  the  future  premiums  can 
be  found  by  multiplying  the  annual  premium  ($13.7725), 
which  these  persons  are  paying,  by  the  discounted  value  of  the 
probability  of  collecting  it.  This  is,  of  course,  the  same  as 
the  present  value  of  a  life  annuity  due  of  $1,  which  we  find  at 
age  24  on  a  3 >4  per  cent  basis  to  be  $20.5922.  Multiplying 
$13.7725  by  $20.5922,  we  have  $283.60607,  which  is  the  pres- 
ent value  of  future  premiums  on  one  policy.  Since  there  are 
89,751  such  policies,  the  present  value  of  the  future  premiums 
on  all  policies  is  $25,453,928,388.  Deducting  this  from  the 
present  value  of  future  death  claims,  we  have  $1,798,953.78, 
which  is  "that  amount"  which  the  insurance  company  should 
hold  as  legal  reserve  in  order  to  be  solvent.  The  sum  actually 
on  hand  is  slightly  less  thali  this  due  to  not  carrying  all  deci- 
mals sufficiently  far. 

Special  methods  of  valuing  the  reserve. — It  has  been  ex- 
plained that  the  reserve  is  a  trust  fund  required  by  law  to  be  on 
hand  at  all  times.  But  it  is  possible  to  evade  this  requirement 
by  a  mathematical  subterfuge  which  makes  a  portion  of  the  re- 
serve available  for  expenses.  This  evasion  is  tacitly  recognized 
by  the  laws  of  many  States  because  of  its  necessity.  We  have 
previously  referred  briefly  to  the  difficulty  of  providing  funds 
for  expenses  at  the  time  required.  We  are  now  in  a  position  to 
see  the  various  methods  by  which  this  difficulty  may  be  met. 

In  one  company  the  gross  premium  on  a  whole  life  policy  at 
age  ?)S  is  $27.00,  and  the  net  premium  $21.08,  leaving  $5.92 
available  for  expenses.  We  may  easily  assume  that  this  is  suf- 
ficient to  cover  annual  collection  costs  and  general  expense, 
leaving  a  margin  for  the  payment  of  settlement  expense  at  ma- 
turity. But  it  is  estimated  that  the  total  cost  of  new  business 
is  around  80  per  cent  of  the  premium  or  about  $16.86,  of 
which  a  large  part  is  the  commission  to  the  agent.  Where  is 
this  sum  to  come  from?  In  a  large  and  old  company  it  may  be 
borrowed  from  surplus  but  in  a  young,  small  company  this 
source  is  not  available.     The  other  possibilities  are: 

1.  To  charge  an  Initiation  fee  or  specially  large  first-year 
premium.  But  this  Is  a  violation  of  the  level-premium  Idea  and 
necessitates  a  difficult  explanation  to  the  insured. 

2.  To  borrow  funds  which  would  otherwise  be  devoted  to 


SURRENDER  FA  LUES  AND  LOANS  101 

paying  surrender  values  and  dividends.  But  this  is  precluded 
by  the  necessity  of  maintaining  a  consistent  dividend  policy  and 
reasonable  surrender  values.  The  latter,  as  stated,  is  regulated 
in  some  States. 

3.  These  difficulties  are  further  complicated  by  the  necessity 
of  meeting  competition. 

There  remains  the  reserve,  if  some  method  of  legally  bor- 
rowing from  it  can  be  devised.  Three  methods  have  been  used 
which  will  be  described  In  the  order  of  their  effect  on  the  re- 
serve. 

1.  The  preliminary  term  plan.  Under  this  plan  the  first 
year  of  the  policy's  term  Is  considered  as  term  insurance;  the 
policy  then  goes  into  effect  In  Its  own  name  at  an  age  one  year 
higher  and  for  a  term  one  year  less.  Take,  for  example,  a 
twenty-payment  life  policy  at  age  35  with  a  net  premium  of 
$29.85.  Of  this,  on  a  3  per  cent  basis,  $22.00  should  be  in 
the  reserve  at  the  end  of  the  first  year.  But  consider  this  as  a 
one-year  term  policy  plus  a  nineteen-payment  life  policy  and 
the  reserve  at  the  end  of  the  first  year  is  zero.  The  full  net 
legal  reserve  the  second  year  Is  $44.72,  while  the  reserve  at 
the  end  of  the  first  year  on  a  19-payment  life  policy  issued  at 
age  Z6  (i.  e.,  preliminary  term  plan)  Is  $23.54.  As  the  years 
elapse  the  preliminary  term  reserve  catches  up  to  the  full  re- 
serve until,  as  shown  in  the  following  table,  by  the  end  of  the 
twentieth  year  the  reserves  are  the  same. 

TABLE  IV— PRELIMINARY  TERM  RESERVE  ON  A  20-PAYMENT 

LIFE  POLICY 
Amount  of  $1,000.     Age  35.     American  Experience  Table  and  3  Per  Cent 
End  of  Policy  Year  Full  Net  Reserve  Preliminary  Term  Reserve 

1 $22.00                                      

2 44.72  $23.54 

3 68.20  47.87 

4 92.46  73.00 

5 117.52  98.96 

10 255.78  242.28 

15 418.33  410.90 

20 609.92  609.92 

If  death  does  not  occur  until  after  the  twentieth  year,  there 
is  obviously  no  difference  in  the  two  plans.  If,  however,  death 
occurs  prior  to  that  time,  the  reserve  of  the  individual  policy- 
holder does  not  contribute  to  the  extent  it  should  and  the  funds 
must  be  procured  elsewhere. 


102    INSURANCE  PRINCIPLES  AND  PRACTICES 

2.  The  modified  preliminary  term  plan.  Instead  of  allowing 
the  entire  reserve  on  a  policy  to  be  freed  for  use  as  expenses 
during  the  first  year,  only  the  reserve  on  an  ordinary  life  policy 
may  be  so  used.  Thus,  the  full  net  reserve  (3  per  cent  basis) 
on  a  twenty-year  endowment  policy  issued  at  age  35  would  be 
$34.59  at  the  end  of  the  first  year.  The  reserve  on  an  ordinary- 
life  policy  is  $22.00,  and  this  may  be  borrowed,  leaving  $12.59 
in  the  reserve.  The  reserve  under  this  plan  in  like  manner 
gradually  approaches  the  full  net  reserve  and  equals  it  at  the 
end  of  the  twentieth  year,  but  the  deficiency  is  never  as  great  as 
under  the  full  preliminary  term  plan.  An  Important  variation 
of  this  method  of  valuation  is  to  use  the  20  payment  life  policy 
as  the  basis  of  calculation  in  place  of  the  ordinary  life. 

3.  Select  and  ultimate  method.  The  mortality  table  deaths 
are  in  excess  of  the  actual  deaths  for  the  first  few  years  of  the 
policy  by  reason  of  medical  selection  and  by  this  method  the 
company  is  permitted  to  discount  this  saving  in  advance.  The 
benefits  of  medical  selection  are  presumed  to  endure  for  five 
years,  the  mortality  the  first  year  being  50  per  cent  of  the 
tabular  or  expected  mortality,  the  second  year's  mortality  6S 
per  cent,  the  third  year's  mortality  75  per  cent,  the  fourth  year's 
mortality  85  per  cent  and  the  fifth  year's  mortality  95  per  cent 
of  expected.  These  savings  the  company  may  anticipate  and 
borrow  from  the  reserve.  Thus,  on  the  twenty-year  endow- 
ment above  mentioned,  the  full  net  reserve  at  the  end  of  the  first 
year  is  $34.59,  but  $6.24  may  be  used,  leaving  $28.35  in  the 
reserve.  The  following  table  will  show  that  by  the  end  of  the 
fifth  year,  the  savings  having  been  exhausted,  the  reserve  on 
the  select  and  ultimate  plan  equals  the  full  net  reserve. 

TABLE  V— SELECT  AND  ULTIMATE  RESERVE  ON  A  20-YEAR 
ENDOWMENT  POLICY 

Amount  $1,000.     Age  35.     American  Experience  Table  and  3  Per  Cent 

Select  and  Ultimate 
End  of  Policy  Year  Full  Net  Reserve  Reserve 

1 $34.59  $28.35 

2 70.40  66.92 

3 107.50  105.93 

4 145.91  145.50 

5 185.71  185.71 

The  stricter  laws  authorize  valuation  on  the  select  and  ulti- 
mate basis  and  this  is  sufficient  for  older  companies.     In  the 


SURRENDER  VALUES  AND  LOANS  103 

Middle  West,  where  many  young  companies  have  been  organ- 
ized In  the  past  few  years,  the  laws  permit  the  preliminary 
term  plans  and  there  has  been  some  agitation  in  the  Middle 
Atlantic  States  recently  to  recognize  the  preliminary  term  plan. 
It  must  be  clearly  understood  that  the  above  statements  are 
neither  direct  nor  implied  reflections  upon  the  standing  of  any 
company,  for  practical  solvency  depends  upon  ability  to  pay 
claims  when  due  and  not  upon  the  possession  at  any  given  mo- 
ment of  funds  segregated  for  a  particular  purpose,  although 
some  may  consider  the  latter  as  a  partial  Index  of  the  condi- 
tion of  a  company.  To  the  writer's  knowledge  there  has  never 
been  a  failure  of  any  company  that  Is  traceable  to  the  use  of 
the  preliminary  term  plan. 

Cash  surrender  values  and  surrender  charges. — Many  poli- 
cies do  not  remain  in  force  for  the  period  for  which  they  were 
originally  Intended.  Through  carelessness,  misunderstanding 
and  necessity  there  are  numerous  surrenders  and  lapses  every 
year.  It  has  been  found,  however,  that  In  case  of  withdrawal 
it  is  not  necessary  for  a  policy-holder  to  forfeit  everything  he 
has  paid  Into  the  company.  As  previously  stated,  the  reserve 
is  the  basis  of  the  surrender  value  and  the  company  stipulates 
In  the  policy  the  amount  of  the  reserve  In  the  form  of  annual 
values  that  will  be  returned  to  the  insured  if  he  no  longer  desires 
to  keep  the  policy  In  force.  The  amount  he  Is  thus  able  to  se- 
cure is  known  as  the  "Cash  Surrender  Value".^ 

No  reserve  or  surrender  value  is  usually  available  to  the  in- 
sured until  the  end  of  the  second  or  third  year  of  the  policy, 
largely  due  to  the  original  commission,  medical  examination, 
and  other  expenses  of  a  new  policy.  However,  the  surrender 
value  continues  to  grow  with  the  reserve,  until  at  the  end  of 
the  5th,  10th,  15th  or  20th  year  the  full  legal  reserve  and  the 
surrender  value  coincide,  as  shown  in  Table  VI.  The  practice 
varies  considerably  among  the  different  companies  and  in  some 
instances  the  cash  value  corresponds  to  the  reserve  at  the  end  of 
the  third  year.  It  should  be  mentioned,  however,  that  where 
this  Is  the  case  those  who  withdraw  In  the  early  years  of  the 
policy  are  not  contributing  their  share  of  the  expenses  of  the 
business. 

*  For  table  of  surrender  values  see  the  policj[  in  Appendix  III.    Also  Table 
yi,  p.  104. 


104    INSURANCE  PRINCIPLES  AND  PRACTICES 

TABLE   VI— ORDINARY-LIFE   POLICY   CASH   AND    LOAN    VALUES 

COMPARED  WITH  FULL  NET  RESERVE 

Age  25.     Annual  Premium  $20.55.     American  Experience  Table  and  3  Per  Cent 

Cash  and  Loan  Values 
Full  Net  Reserve  End  of  Year  of  an  Old  Line  Company 

$8.60 1                                         

17.47 2  $7.47 

26.61 3  16.61 

36.04 4  26.04 

45.76 5  35.76 

55.77 6  46.77 

66.09 7  58.09 

76.72 8  69.72 

87.67 9  81.67 

98.94 10  93.94 

110.55 11  106.55 

122.49 12  119.49 

134.77 13  132.77 

147.39 14  146.39 

160.36 15  160.36 

173.67 16  173.67 

187.34 17  187.34 

201.37 18  201.37 

215.77 19  215.77 

230.50 20  230.50 

A  nominal  surrender  charge  is  frequently  made,  seldom  ex- 
ceeding $10  per  $1,000  of  insurance  and  often  on  a  graduated 
scale,  decreasing  as  the  policy  becomes  older.  The  charge  is 
justified  on  three  grounds.  ( 1 )  The  expenses  incidental 
to  the  surrendering  of  the  policy  should  not  be  borne  by 
the  remaining  policy-holders;  (2)  the  company  incurs  the 
expense  of  replacing  a  policy  in  the  group  for  the  one  that  has 
been  lost;  and  (3)  the  best  medical  risks  voluntarily  withdraw 
and  this  results  in  an  adverse  mortality  selection.  There  can 
be  little  doubt  as  to  the  accuracy  of  the  first  two  but  the  last 
has  not  been  definitely  established.  As  to  the  insured,  it  would 
seem  that  the  best  reason  for  such  a  charge  is  the  discourage- 
ment of  unnecessary  surrenders.  The  amount  of  the  charge  has 
been  a  subject  of  State  regulation,  referred  to  more  fully  at  the 
end  of  this  chapter. 

Development  and  use  of  the  "cash  value"  clause. — The 
insurance  companies  have  not  always  guaranteed  surrender 
values;  in  fact,  there  was  a  time  when  the  lapsing  of  a  policy 
meant  the  forfeiture  of  all  rights  thereunder.  This,  as  we  have 
seen,  was  unfair  to  the  retiring  member  and  some  of  the  com- 
panies consequently  granted  cash  surrender  values  voluntarily. 
This    was    followed    by    the    so-called    non-forfeiture    laws 


SURRENDER  VALUES  AND  LOANS  105 

which  make  such  values  obligatory,  except  for  term  insurance. 
None  of  these  laws  require  a  cash  value  prior  to  the  third  year 
but  there  are  no  restrictions  if  a  company  desires  to  grant  it 
earlier.  As  a  result  the  tendency  of  recent  years  has  been  the 
opposite  of  the  early  days  of  life  insurance  and  in  their  rivalry 
for  business  the  companies  have  sought  to  outdo  each  other  in 
the  liberality  of  their  surrender  values.  While  there  is  no  doubt 
that  a  cash  surrender  value  is  not  only  a  privilege  but  a  right  of 
the  insured,  the  use  of  it  should  be  confined  to  cases  of  absolute 
necessity.  Too  often  it  has  led  to  unnecessary  forfeitures  of 
policies  and  irreplaceable  loss  of  protection.  Nor  has  education 
as  to  the  purpose  of  the  policy  served  to  lessen  forfeitures.  In 
fact,  they  have  grown  at  an  alarming  rate.  Some  idea  of  the 
extent  of  this  practice  is  shown  by  a  comparison  of  the  ways  in 
which  policies  are  terminated.  In  a  representative  year,  of  all 
the  policies  written  off,  about  one-third  in  number  and  one-fourth 
in  amount  are  surrendered.  An  effort  has  been  made  by  some  of 
the  companies  to  check  this  by  requiring  a  sixty  or  ninety-day 
notice.  But  as  long  as  liberality  in  this  respect  is  used  as  a  sell- 
ing point  it  is  doubtful  if  much  can  be  accomplished. 

Other  guaranteed  value  options. — Besides  the  privilege  of 
securing  the  cash  value  of  the  policy  by  surrendering  it  to  the 
company  there  are  other  options  left  to  the  insured  if  he  no 
longer  desires  to  pay  premiums.  The  two  most  commonly 
found  are  those  granting  extended  term  insurance  and  paid- 
up  insurance.  These  arc  usually  stipulated  in  the  non-forfei- 
ture laws  in  case  of  lapse.  Extended  insurance  means  that  the 
full  amount  of  the  policy  will  remain  in  force  for  such  period 
of  time  as  the  surrender  value  will  purchase  term  insurance  if 
used  as  a  net  single  premium  at  the  attained  age.  This  privi- 
lege was  the  first  development  in  guaranteed  values,  the  first 
to  be  required  under  non-forfeiture  laws,  and  it  is  also  the 
provision  which  is  usually  automatic  in  case  of  lapse.  Paid- 
up  insurance  means  that  the  surrender  value  may  be  used 
to  change  the  policy  to  one  that  is  fully  paid,  of  an  amount 
which  the  surrender  value  used  as  a  net  single  premium  will 
purchase  at  the  attained  age.  Besides  the  options  mentioned 
above  annuities  of  various  kinds  are  sometimes  procurable 
by  the  surrender  value  used  as  a  net  single  premium.  In 
general  the  insured  may  use  the  surrender  value  of  his  policy  as 
a  net  single  premium  to  buy  whatever  the  insurance  company 
has  for  sale. 


106    INSURANCE  PRINCIPLES  AND  PRACTICES 

Policy  loans  described. — Originally  policy  loans  were  the 
result  of  voluntary  concessions  by  the  company,  available  only 
to  temporarily  pay  premiums  and  seldom  for  more  than  two  or 
three  months.  Competition  has  promoted  promiscuous  borrow- 
ing, regardless  of  the  purpose,  and  any  amount  up  to  the  cash 
surrender  value  can  usually  now  be  secured.^  A  specified  rate 
of  interest,  not  exceeding  five  or  six  per  cent,  is  usually  charged 
either  until  the  loan  is  repaid  by  the  insured  or  the  policy  ma- 
tures, in  which  latter  case  the  loan  will  be  deducted  from  the 
proceeds  along  with  any  accrued  interest.  Interest  is  usually 
paid  in  advance  and  frequently  the  surrender  value  may  be  bor- 
rowed as  of  the  end  of  the  next  succeeding  year  if  the  premium 
and  one  year's  interest  on  the  loan  have  been  paid.^ 

Extent  and  nature  of  policy  loans. — The  extent  to  which  this 
privilege  is  used  can  be  understood  when  it  is  said  that  nearly 
one-fifth  of  the  reserves  of  the  insurance  companies  are  in- 
vested in  policy  loans.  This  has  been  the  subject  of  much  criti- 
cism, since  it  is  maintained  that  insurance  companies  were  not 
originally  intended  to  perform  the  functions  of  banks.  During 
the  last  score  of  years  the  percentage  of  reserves  invested  in 
policy  loans  has  steadily  increased,  the  year  1919,  however, 
being  an  exception,  as  there  was  actually  a  decrease  during  that 
year.  At  the  end  of  1918  the  outstanding  policy  loans  for  all 
the  companies  licensed  to  do  business  in  the  State  of  New  York 
were  $713,087,000,  which  was  decreased  to  $697,446,000  in 
1919.  It  is  claimed  this  decrease  was  due  to  the  unusual  pros- 
perity during  that  year  and  it  is  expected  that  a  period  of  finan- 
cial stringency  will  again  increase  the  loans.  One  of  the 
greatest  reasons  for  these  large  policy  loans  is  the  exploitation 
of  this  privilege  as  a  competitive  selling  point.  Some  companies 
have  attempted  to  discourage  policy  loans  by  requiring  sixty 
or  ninety-day  notices  and  while  this  may  act  as  a  deterrent,  the 
only  real  solution  to  the  problem  is  to  educate  the  policy-holders 
in  this  respect.  Too  few  realize  that  when  they  borrow  on 
their  policy  they  are  leaving  a  legacy  of  debt  to  the  benefi- 
ciaries. 

Advantages  and  disadvantages  of  policy  loans, — As  a  gen- 
eral proposition  the  loan  provision  is  bad  for  both  insurer  and 
insured,  although  there  are  exceptions.     For  example,  in  times 

'For  examples  of  loan  values  see  the  policy  in  Appendix  III  and  also  Table 
VI,  p.  104. 
'  For  provisions  see  policy  in  Appendix  III. 


SURRENDER  VALUES  AND  LOANS  107 

of  financial  stringency  loans  on  life  insurance  policies  have  pre- 
vented financial  embarrassment  and  possible  bankruptcy.  The 
availability  of  such  sums  is  also  advantageous  when  a  rare  op- 
portunity for  wise  investment  presents  itself.  Furthermore, 
many  persons  take  insurance  only  because  of  this  feature  and 
otherwise  might  not  procure  protection. 

The  objections  to  policy  loans  are  more  numerous  than  the 
advantages.  First,  it  reduces  the  amount  of  the  insurance  car- 
ried by  the  individual,  since  the  loan  plus  any  accrued  interest 
will  be  deducted  from  the  proceeds  of  the  policy.  Second,  the 
insurance  companies,  realizing  that  these  loans  are  in  most  cases 
demand  liabilities,  have  to  carry  large  amounts  of  cash  and 
other  liquid  assets,  resulting  in  a  lower  interest  return  on  the 
investments.  Third,  the  time  when  loans  are  greatest  is  dur- 
ing  a  panic  period.  This  naturally  is  the  poorest  time  to  liquid- 
ate investments  and  the  company  sustains  an  additional  loss. 
Fourth,  the  effect  on  lapses  appears  very  serious,  when  the  high 
percentage  of  the  reserve  loaned  to  the  policy-holders  is  realized 
and  when  it  is  further  noted  that  the  majority  of  borrowers 
cease  paying  before  the  maturity  of  their  policies.  It  might  be 
mentioned  in  this  connection  that  only  about  eight  per  cent  of 
the  loans  are  ever  repaid  before  the  maturity  of  the  policy. 
Fifth,  it  is  sometimes  argued  that  this  lapsing,  which  is  trace- 
able to  loans,  also  results  in  an  adverse  mortality  selection,  on 
the  assumption  that  the  group  that  borrows  and  later  lapses  con- 
sists of  the  best  risks  physically.  As  in  the  case  of  the  cash 
surrender  value,  the  accuracy  of  this  argument  is  difficult  to 
prove.  It  is,  however,  reasonable  to  assume  that  the  poorer 
risks  do  not  take  the  chances  of  surrendering  insurance  that  the 
best  risks  are  willing  to  take. 

When  policy  loans  are  allowed  to  run  and  the  interest  accrues 
for  a  considerable  length  of  time  it  is  not  a  very  attractive 
financial  proposition  to  pay  up.  Therefore  it  has  become  quite 
customary  to  cancel  the  old  policy  and  secure  a  new  one.  This 
often  involves  difficulties  because  of  inability  to  pass  the 
required  medical  examination.  It  is  evident  that  policy  loans 
are  frequently  disastrous  and  consequently  should  be  discour- 
aged in  most  cases. 

State  supervision. — ^We  have  seen  In  this  chapter  that  one  of 
the  most  important  functions  of  a  life  insurance  company  Is  to 
keep  intact  the  large  reserve  fund  which  has  been  Intrusted  to 
it.    In  order  that  the  great  mass  of  people,  to  whom  this  reserve 


108    INSURANCE  PRINCIPLES  AND  PRACTICES 

belongs,  may  be  sufficiently  protected,  the  several  States  have 
passed  insurance  laws.  Supplemental  insurance  incorporation 
laws  make  requirements  much  more  rigid  than  those  specified  in 
general  Incorporation  laws.  When  a  life  insurance  company  is 
organized  a  common  requirement  Is  the  deposit  of  from  one  to 
two  hundred  thousand  dollars  worth  of  approved  securities  with 
the  State,  which  is  to  act  as  a  guarantee  fund.  A  maximum  rate 
of  dividend  which  the  stock-holders  may  receive  Is  frequently 
specified.  The  company  must  also  agree  to  furnish  certain 
statements,  permit  examinations,  put  certain  provisions  in  their 
policies  and  comply  with  numerous  regulations.  The  necessity 
for  these  arises  from  the  fiduciary  relationship  of  the  company 
to  the  Insured.  Not  only  Is  the  company  Itself  affected  but  the 
actions  of  insurance  agents  and  brokers  are  also  regulated  by 
law,  particularly  as  'regards  representations  concerning  the 
relative  merits  of  different  companies,  the  "twisting"  of  poli- 
cies and  prospective  dividends. 

In  order  further  to  safeguard  the  Interests  of  the  policy-hold- 
ers the  manner  in  which  the  reserve  may  be  Invested  Is  usually 
specified  by  statute.  The  different  classes  of  securities  in  which 
they  may  place  their  assets  are  grouped  below  In  the  order  of 
their  freedom  from  restriction: 

1.  Issues  of  the  Federal  Government. 

2.  Bonds  of  States,  counties,  and  municipalities,  If  their  rec- 
ord is  satisfactory. 

3.  Ordinary  corporation  bonds,  where  there  has  been  no  de- 
fault of  Interest. 

4.  Real  estate  and  farm  loan  mortgages  on  property  worth 
twice  the  loan. 

5.  Real  estate  for  the  use  of  the  business  only. 

6.  Other  property  if  acquired  through  foreclosure  or  as 
security  for  a  loan. 

|7.   Stocks  of  dividend-paying  corporations. 

Annual  detailed  statements  of  these  Investments  are  furnished 
to  the  proper  state  officials. 

Not  only  is  the  safety  of  the  reserve  carefully  guarded 
but  the  manner  in  which  It  Is  to  be  used  In  case  a  policy 
is  surrendered  Is  specified.  In  most  States  the  minimum 
amount  of  cash  surrender  value  Is  stipulated  although  all 
good  and  reliable  companies  actually  grant  more  than 
this  minimum.  The  New  York  law  is  typical,  requiring 
a     cash     surrender     value      after     the     policy     has     been 


SURRENDER  VALUES  AND  LOANS  109 

in  force  for  three  full  years,  the  minimum  to  be  the  re- 
serve on  such  policy  computed  according  to  the  standard  adopted 
by  the  company,  together  with  the  value  of  any  dividend  addi- 
tions to  the  policy,  after  deducting  any  indebtedness  to  the  com- 
pany and  one-fifth  of  the  entire  reserve,  or  the  sum  of  two  and 
fifty  one-hundrcdths  dollars  for  each  $100  of  the  face  of  the 
policy,  if  the  latter  is  more  than  said  one-fifth.  As  was  pre- 
viously mentioned,  this  sum  can  be  used  in  various  ways  and 
does  not  have  to  be  taken  in  the  form  of  cash. 

While  the  non-forfeiture  laws  compel  the  companies  to 
grant  surrender  values,  they  do  not  require  them  to  make  loans 
and  to  keep  the  face  of  the  policy  in  force.  Therefore  the  loan 
feature  may  be  called  gratuitous  on  the  part  of  the  insurer. 
While  the  policy-loan  provision  is  largely  a  selling  point  and 
the  result  of  competition,  there  is  no  doubt  that  it  is  better  in 
many  cases  than  the  surrender.  For  it  is  possible  to  secure  ap- 
proximately the  same  amount  through  a  cash  loan  as  through 
surrender,  and,  further,  when  the  policy  is  surrendered,  the  in- 
surance is  cancelled  and  probably  lost  forever,  while  under  the 
loan  the  insurance  stays  in  force  subject  to  the  deduction  of  the 
amount  of  the  loan  in  case  of  death  or  maturity  prior  to  re- 
payment. 

There  are  many  other  State  regulations  of  vital  interest  to 
the  insured,  especially  those  pertaining  to  dividends,  which  will 
be  referred  to  in  the  next  chapter. 


Chapter  VIII 

SURPLUS  AND   DIVIDENDS 

The  origin  of  the  surplus. — The  premiums  paid  on  policies 
take  care  of  the  death  claims  and  the  reserve.^  In  fact,  the  net 
premium  as  calculated  is  usually  more  than  sufficient  to  meet 
these  items,  much  of  the  excess  being  due  to  a  low  interest  rate 
assumption  and  the  extensive  use  of  the  American  Experience 
Table  of  Mortality,  which  overestimates  the  deaths  in  early 
years.  Morever,  the  allowance  which  is  added  to  the  net  pre- 
mium in  the  form  of  loading  for  expenses  is  frequently  exces- 
sive. As  prudent  managers  the  companies  have  underestimated 
their  income  and  overestimated  their  future  liabilities.  There- 
fore after  all  the  items  of  expense,  cost  of  mortality,  and  re- 
serve are  taken  care  of,  there  is  usually  a  sum  remaining  which 
is  known  as  the  "surplus." 

Participating  and  non-participating  policies. — In  a  mutual 
company  all  of  this  surplus  belongs  to  the  policy-holders  but 
in  a  stock  company,  if  the  dividend  is  not  limited,  a  considerable 
portion  may  go  to  the  stockholders.  Policies  are  therefore  des- 
ignated as  participating  and  non-participating,  having  reference 
to  whether  or  not  they  share  in  the  profits.  The  policy-holder  is 
in  the  position  of  a  consumer  who  may  deal  either  with  a  profit- 
making  or  a  co-operative  store.  As  the  mutual  idea  has  gained 
headway  many  stock  companies  have  mutualized  and  most 
of  those  that  have  not  also  write  participating  business.  The 
result  is  that  nearly  all  policies  now  being  written  are  really 
profit-sharing.  The  theory  of  the  participating  business  Is  that 
more  than  sufficient  will  be  charged  to  meet  anticipated  cost  and 
expense,  and  that  after  the  actual  cost  has  been  definitely  ascer- 
tained any  surplus  will  be  returned  to  the  policy-holders  in  the 
form  of  a  dividend.  On  the  other  hand,  the  non-participating 
business  discounts  or  anticipates  the  future  dividends  and  con- 
sequently charges  a  lower  initial  premium.  However,  it  has 
been  demonstrated  that  the  premium  on  a  participating  policy  in 
a  good  mutual  will,  in  the  course  of  time,  be  reduced  by  divi- 

*  Except  those  on  the  natural  premium  plan. 

110 


SURPLUS  AND  DIVIDENDS  111 

dends  to  less  than  the  non-participating  premium  and  that  the 
net  cost  in  a  long  life  is  lower  than  on  the  non-participating 
policy.  The  latter  may  have  other  advantages  which  at  least 
partially  offset  this.  Lastly,  we  have  the  gain  from  forfei- 
tures. As  mentioned  before,  many  companies  do  not  grant  sur- 
render values  until  the  end  of  the  third  policy  year  and  if  a 
policy  is  lapsed  during  that  period  the  reserve  is  withheld  by 
the  companies.  Since  the  greatest  number  of  lapses  occur  in 
the  first  few  years  of  the  life  of  the  policy  it  will  be  seen  that 
in  the  majority  of  cases  the  company  retains  a  considerable  sum, 
a  portion  of  which  is  saving.  Against  this,  however,  the  heavy 
expenses  of  the  early  years  must  be  charged.  It  has  been  ar- 
gued that  those  who  lapse  are  a  select  group  and  therefore 
cause  an  adverse  mortality  selection  which  offsets  the  apparent 
gain,  but  this  is  not  borne  out  by  the  statistics  of  some  of 
the  reliable  companies.  The  second  argument  against  this 
item  as  a  gain  is  that  a  policy  has  been  lost  and  must  be 
replaced,  which  will  mean  expense.  This  of  course  is  a  valid 
argument. 

Apportionment  of  surplus. — A  surplus  having  been  earned, 
some  disposition  of  it  must  be  made.  In  participating  in- 
surance it  belongs  to  the  policy-holders;  In  non-participating 
the  stockholders  get  it.  How  to  divide  it  among  stockholders 
is  not  much  of  a  problem,  but  since  most  insurance  is  written 
on  the  participating  plan,  the  important  and  difficult  problem 
is  to  apportion  It  equitably  among  the  policy-holders. 

The  method  of  apportioning  the  surplus  most  commonly  in 
use  Is  known  as  the  "contribution  plan."  It  Is  assumed  in  this 
plan  that  a  policy  should  receive  as  It  has  contributed.  In 
order  to  attain  this  result  the  policy  is  credited  with  (1)  the 
terminal  reserve  of  the  previous  year,  because  this  belongs  to 
it,  as  indicated  In  Chapter  VI;  (2)  the  premium  of  the  year 
just  ended,  since  the  policy  must  contribute  this  to  the  funds 
available  for  death  claims  and  reserve;  (3)  Interest  on  the  re- 
serve and  premiums,  since  the  company  has  had  the  use  of  the 
money.  It  Is  charged  with  ( 1 )  the  policy's  share  of  actual 
expenses;  (2)  actual  mortality  cost  for  the  year;  and  (3) 
terminal  reserve  as  of  the  end  of  the  current  year.  The  bal- 
ance to  the  credit  of  the  policy  is  surplus.  It  is  evident  that  to 
keep  a  separate  account  for  every  policy  would  be  a  gigantic 
task.  It  is  possible,  however,  to  keep  an  account  for  each  class 
and  age  of  policy:  as,   for   Instance,   endowments,   whole-life 


112    INSURANCE  PRINCIPLES  AND  PRACTICES 

term,  etc.;  policies  of  each  kind  issued  in  1904,  1905,  etc.; 
policies  of  each  kind  segregated  according  to  age  at  issue.  To 
go  further  than  this  would  be  to  increase  the  expense  beyond 
the  benefit  to  be  gained.  The  system  may  be  compared  to  the 
accounts  of  a  commission  agent  who  has  so  large  a  number  of 
consignors  that  it  is  possible  to  do  substantial  justice  by  classi- 
fying them  into  groups  according  to  the  character  of  product 
and  size  of  account,  and  who  pays  interest  upon  sums  left  with 
him  on  deposit. 

It  can  be  seen,  however,  that  a  number  of  problems  present 
themselves  in  working  out  the  items  of  this  account.  General 
expenses  can  be  charged  fairly  equitably  on  the  basis  of  $1,000 
of  insurance  but  when  it  comes  to  the  cost  of  getting  the  busi- 
ness it  is  very  difficult  to  decide  whether  the  new  or  the  old 
policies  should  bear  this.  To  complicate  the  problem  still 
more,  the  equity  of  dil^erent  types  of  policies  presents  itself. 
Distribution  of  interest  earnings  is  not  so  difficult.  Since  the 
interest  Is  earned  on  the  reserve,  the  best  solution  is  to  allow 
the  interest  on  the  basis  of  the  reserve  as  of  the  end  of  the  pre- 
vious year  plus  the  premium  paid  at  the  beginning  of  the  year. 
Therefore,  the  age  of  the  policies,  the  kind  of  policies,  and  the 
number  of  policies  in  the  group  all  serve  to  make  the  subject 
one  which  is  difficult  to  solve,  and  it  is  doubtful  If  any  plan,  even 
with  various  modifications,  gives  absolute  accuracy  and  fair- 
ness between  the  individual  policyholders. 

Distribution  of  surplus. — The  greater  part  of  the  surplus 
is  distributed  to  the  policy-holders  in  a  mutual  company  and 
also  to  participating  policies  In  stock  companies.  The  common 
practice  now  is  to  pay  it  In  the  form  of  an  annual  dividend. 

In  the  past  not  all  companies  saw  fit  to  pay  this  sum  as  a 
dividend  but  allowed  It  to  pile  up  until  a  huge  surplus  was 
accumulated.  This  usually  led  to  extravagance  on  the  part 
of  the  company  and  to  prevent  the  flagrant  waste  of  policy- 
holders' funds  some  States  have  passed  laws  compelling  distri- 
bution. For  Instance,  the  New  York  laws  limit  the  amount 
that  may  be  withheld  from  policy-holders  to  a  varying  percent- 
age of  the  reserve  liabilities  as  follows: 

If  the  net  value  of  the  policies  in  force  Is  less  than  $100,000, 
20  per  cent  of  such  net  value  or  the  sum  of  $10,000, 
whichever  is  the  larger,  may  be  retained  as  a  contingency 
reserve.  If  the  net  value  of  the  policies  Is  over  $100,000, 
then  there  shall  be  a  decrease  of  the  percentage  thereof,  In 


SURPLUS  AND  DIVIDENDS  113 

measuring    the    contingency    reserve,    of    1/2    per    cent    for 
each  $100,000  of  net  value  up  to  $1,000,000. 

y2%  for  each  $1,000,000  of  net  value  from  1  million  up  to  10  million 
1/2%  for  each  2,500,000  of  net  value  from  10  million  up  to  20  million 
J^%  for  each  5,000,000  of  net  value  from  20  million  up  to  50  million 
J/2%  for  each  25,000,000  of  net  value  from  50  million  up  to  100  million  or  over 


The  sum  left  undistributed  goes  under  many  headings, 
varying  with  the  practices  of  the  respective  companies.  The 
most  common  terms  employed  are  "contingency  reserve,"  "mor- 
tality fluctuation  fund,"  "asset  fluctuation  fund,"  "equaliza- 
tion fund",  and  other  similar  names  denoting  the  purpose  of 
the  account. 

Divisible  surplus  and  the  nature  of  a  life  insurance  divi- 
dend.— After  special  reserves,  as  set  forth  above,  are  deducted 
from  the  surplus,  the  remainder  is  available  for  distribution  as 
a  "dividend."  The  term  "dividend"  as  applied  to  life  insur- 
ance policies  is  really  a  misnomer.  We  have  seen  that  the 
source  of  dividends  really  lies  in  the  fact  that  it  has  not  cost 
as  much  to  conduct  the  business  as  was  anticipated.  In  other 
words,  as  in  a  co-operative  store,  the  dividend  is  not  a  profit 
but  a  saving,  which  saving  is  refunded  to  the  policy-holders  in 
the  proportion  which  they  were  overcharged.  It  differs  from 
dividends  on  shares  of  stock  as  it  represents  salvage  and  not 
profits,  and  for  this  reason  should  not  be  subject  to  taxation. 

Size  and  importance  of  dividends. — So  large  are  the  "divi- 
dends" in  some  cases  that  it  is  very  important,  when  purchas- 
ing insurance  and  making  comparison  of  costs  of  different 
companies,  to  take  into  consideration  the  dividends  that  have 
been  paid  and  the  prospects  that  they  will  be  continued.  For 
a  comparison  of  participating  and  non-participating  policies 
in  the  early  years  when  the  participating  rate  is  the  higher  of 
the  two,  the  non-participating  policy  should  receive  credit  for 
the  amount  of  interest  that  this  diffence  in  premiums  would 
earn.  Thus,  if  the  premium  the  first  year  on  a  non-participa- 
ting policy  is  $14.72,  and  on  a  participating  policy  $18.00, 
the  interest  on  the  difference  between  the  two  should  be  credited 
to  the  non-participating  policy.  It  is  frequently  maintained 
that  the  individual  would  not  be  likely  to  invest  the  difference 
and  receive  interest  on  it.  Nevertheless,  this  is  the  only  man- 
ner by  which  an  accurate  comparison  can  be  made.  Table  I 
shows   the   existing  dividend  scale  of  a   participating  policy 


114    INSURANCE  PRINCIPLES  AND  PRACTICES 


issued  at  age  21,  on  a  3^  per  cent  basis,  exhibiting  a  grad- 
ual increase  as  the  policy  becomes  older.  Compare  the  column 
headed  "net  cost"  in  Table  II,  which  gives  the  constant  non- 
participating  rate  at  age  21  on  an  ordinary-life  policy,  and 
shows  how  the  participating  rate  soon  reaches  the  non-partici- 
pating and  then  continues  on  its  downward  journey  until  there 
is  no  doubt  as  to  which  has  the  lowest  cost  in  later  life. 


TABLE  I 

Age  21.     Ordinary-Life  Policy,  Partic- 
ipating.   Premium  $17.21 

End  of 

Year              Dividend  Net  Cost 

1 $3.27  $13.94 

2 3.34  13.87 

3 3.41  13.80 

4 3.49  13.72 

5 3.56  13.65 

6 3.65  13.56 

7 3.73  13.48 

8 3.83  13.38 

9 3.91  13.30 

10 4.01  13.20 

15 4.55  12.66 

20 5.22  11.99 

25 6.10  11.11 

30 7.28  9.93 

35 8.86  8.35 

40 10.81  6.40 

45 13.08  4.13 

50 15.66  1.55 


TABLE  II 

Age  21.      Ordinary-Life  Policy,  Non- 
Participating.    Premium  $13.77 

End  of 

Year                Cost  Saving  Excess 

1 $13.77  $0.17 

2 13.77  .10 

3 13.77  .03 

4 13.77  $0.05 

5 13.77  .12 

6 13.77  .21 

7 13.77  .29 

8 13.77  .39 

9 13.77  .47 

10 13.77  .57 

15 13.77  1.11 

20 13.77  1.78 

25 13.77  2.66 

30 13.77  3.84 

35 13.77  5.42 

40 13.77  7.37 

45 13.77  9.64 

50 13.77  12.22 


Since  it  is  desirable  to  try  to  anticipate  the  possible  dividends, 
this  is  often  attempted  approximately  by  an  examination 
of  the  sources,  and  several  ratios  are  commonly  em- 
ployed for  this  purpose.  A  very  common  one  is  the  ratio  of 
actual  to  expected  mortality,  a  low  ratio  being  presumed  to 
indicate  the  exceptional  health  of  the  risks  on  the  company's 
books.  Unless  made  advisedly,  a  comparison  of  different 
companies  in  this  respect  is  fraught  with  considerable  danger. 
For  example,  it  is  manifestly  unfair  to  compare  a  young  com- 
pany with  an  old  one,  inasmuch  as  nearly  all  the  lives  in  a 
new  company  are  freshly  selected,  while  nearly  all  of  the  risks 
of  the  older  company  have  been  on  the  books  many  years. 
While  the  mortality  of  the  new  company  may  be  very  low  for 


SURPLUS  AND  DIVIDENDS  115 

a  few  years,  It  is  quite  possible  that  it  will  be  fully  as  large 
as  that  of  the  older  company  after  this  temporary  advantage 
disappears.  Likewise  the  class  of  business  in  which  the  com- 
pany specializes  may  be  an  influential  factor.  It  has  been 
said,  for  example,  that  the  mortality  on  endowment  policies 
is  much  lower  than  on  whole-life  policies.  Another  mislead- 
ing ratio  is  that  of  actual  expenses  to  loading,  which  being 
low,  is  often  assumed  to  indicate  economical  management. 
It  should  be  plain  that  the  result  of  this  ratio  is  dependent, 
not  only  on  the  amount  actually  expended,  but  also  upon  the 
assumed  expenses  or  loading.  In  order  to  effect  a  low  ratio 
of  the  above  type  it  is  necessary  only  to  increase  the  loading 
charged  the  policy-holder.  Another  ratio  is  actual  interest 
earned  to  assumed  interest  or  "interest  required."  In  a  com- 
parison of  companies  they  must  all  be  operating  upon  the  same 
interest  basis,  otherwise  the  numerators  of  the  ratios  are  dis- 
similar in  character  and  the  results  nil.  The  safety  of  the 
investments  likewise  receives  no  consideration,  though  very 
important.  As  no  one  would  think  of  judging  an  industrial 
corporation  by  a  comparison  of  "anticipated"  cost  of  a  unit 
of  product  and  actual  cost  of  the  same  or  by  a  comparison  of 
actual  earning  and  a  "fair"  return  on  investment  without 
further  definition  and  qualification,  so  these  comparisons  in 
life  insurance  usually  prove  fallacious. 

Time  of  distribution. — As  mentioned  above,  the  dividend 
is  usually  on  an  annual  basis.  Not  only  does  this  produce  the 
best  results  in  most  instances  but  in  some  States  it  is  required 
by  law  after  the  third  policy  year.  It  is  fairest  to  the  policy- 
holders and  prevents  the  company  from  having  an  idle  fund 
open  to  abuse  or  extravagance,  as  in  the  case  where  the  div- 
idend is  deferred.  No  company,  however,  pays  a  dividend 
until  the  policy  has  been  In  force  at  least  one  year,  and  many 
require  that  two  or  three  annual  premiums  shall  have  been 
paid.  When  it  commences,  however,  the  dividend  continues 
and  grows  larger  the  longer  the  policy  runs,  unless  the  com- 
pany meets  with  some  unusual  adverse  experience. 

The  annual  dividend  scheme  has  not  always  been  in  effect 
but  grew  out  of  the  deferred  dividend  plan.  Under  this  sys- 
tem dividends  were  not  paid  except  at  the  end  of  certain  pe- 
riods such  as  5,  10,  15  or  20  years.  "Deferred  dividend 
policies"  were  sold  In  great  quantities  at  one  time,  but  because 
of  the  dissatisfaction  resulting  from  misunderstandings  and 


116    INSURANCE  PRINCIPLES  AND  PRACTICES 

overestimates  of  prospective  dividends,  many  States  prohib- 
ited them  and  they  have  now  been  practically  abandoned. 

Another  type  of  dividend  was  given  under  the  old  ton- 
tine policy,  now  legislated  out  of  existence.  Under  this  pol- 
icy all  of  the  persistent  policy-holders  at  the  end  of  a  specified 
period  received  the  available  funds.  Those  who  had  lapsed 
prior  to  this  time  forfeited  everything  they  had  paid,  as  did 
those  who  had  died,  the  result  usually  being  a  large  *'melon" 
for  those  who  remained.  The  deferred-dividend  policy  ap- 
plied this  same  forfeiture  principle  to  dividends  only,  the  ex- 
tent of  its  effect  in  this  case  depending  on  the  length  of  time 
the  dividends  were  withheld.  These  plans  Introduced  into  life 
Insurance  a  speculative  element  entirely  foreign  to  its  purpose. 
The  deferred  dividend  was  undesirable  because  ( 1 )  the  sur- 
vivors gained  by  the  death  of  others,  (2)  the  large  undis- 
tributed sum  held  by  the  company  frequently  resulted  in 
extravagance  and  (3)  agents  overestimated  future  dividends 
and  many  misunderstandings  followed. 

Special  types  of  dividends. — Two  other  special  forms  of 
dividend  should  be  mentioned.  The  first  is  the  "guaranteed 
dividend,"  where  the  company  promises  at  the  time  of  writing 
the  policy  that  a  dividend  will  be  paid.  The  other  is  the  "pre- 
ferred dividend,"  which  is  nothing  more  than  the  preference 
of  policy-holders  over  stockholders,  in  the  case  of  stock  or 
mixed  companies.  A  guaranteed  dividend  is  really  not  a  div- 
idend, as  the  cost  of  it  may  readily  be  Included  in  the  premium; 
In  fact  in  most  States  the  insurance  laws  make  it  illegal  to 
promise  dividends  unless  the  cost  of  the  same  are  compre- 
hended in  the  premium. 

As  a  result,  neither  companies  nor  their  agents  Issue  any 
statements  which  might  be  constructed  as  a  promise  of  divi- 
dends. They  do,  however,  issue  "Illustrative  dividends"  such 
as  those  in  Table  I,  which  are  figures  showing  what  might  be 
expected  if  the  existing  dividends  are  maintained.  The  dan- 
ger of  overestimating  future  dividends  was  well  demonstrated 
by  the  experience  of  1918,  when  many  dividends  were  cut  or 
abandoned  owing  to  the  unusual  mortality. 

Sources  of  dividends. — A  more  detailed  explanation  of  the 
sources  of  surplus  is  necessary  in  order  to  understand  the 
dividends  paid  on  life  insurance  policies. 

Mortality  saving  is  usually  one  of  the  most  important 
sources.      Since  the  American  Experience  Table  is  used  by 


SURPLUS  AND  DIVIDENDS  117 

practically  all  companies  to  calculate  the  net  premiums,  most 
companies  will  have  this  source.  This  being  an  "Ultimate 
Table,"  ignoring  medical  selection  and  constructed  prior  to 
the  recent  strides  of  medicine  and  surgery  which  have  greatly 
lengthened  life,  it  anticipates  a  much  higher  rate  of  death 
than  that  which  actually  occurs.  Many  of  the  companies  with 
rigid  medical  examination  show  an  actual  experience  of  from 
SS  to  65  per  cent,  of  expected  mortality.  As  a  natural  con- 
sequence the  reserves  are  held'  longer,  become  larger  on  the 
average  and  earn  more  interest  than  anticipated;  and  due  to 
the  longer  life  of  the  Insured  more  premiums  arc  collected. 

Another  source  is  loading,  which  includes  not  only  the  reg- 
ular expenses  but  usually  a  sum  for  contingencies,  such  as 
high  death  rates  due  to  epidemics,  loss  on  investments  on  ac- 
count of  the  unprofitableness  of  investments  or  the  failure  to 
secure  Investments  earning  the  assumed  rate  of  interest.  How- 
ever, expenses  can  all  be  calculated  very  closely  and  conse- 
quently economies  do  not  contribute  a  very  great  amount  of  sur- 
plus to  the  business. 

Next  we  have  gains  from  investments,  which  are  of  two 
kinds:  those  derived  from  appreciation  in  the  value  of  securi- 
ties and  those  secured  through  larger  interest  earnings  than 
the  rate  assumed  In  the  calculation  of  premiums.  The  latter 
has  become  more  important  during  recent  years,  owing  to 
the  steady  Increase  in  the  rate  of  interest  paid  on  securities. 
With  the  exception  of  the  years  1918  and  1919,  when  the 
Insurance  companies  absorbed  a  lot  of  low  interest-bearing 
government  securities,  they  have  been  favorably  affected  by 
these  higher  Interest  rates,  although  the  benefit  to  policy-hold- 
ers is  offset  by  the  lower  purchasing  power  of  money. 

Lastly,  and  least  in  importance,  are  the  gains  from  forfei- 
tures which  sometimes  occur  in  companies  that  do  not  grant 
surrender  values  during  the  early  years  of  the  policy. 

Dividend  options. — The  form  in  which  a  dividend  may  be 
taken  Is  usually  optional  with  the  policy-holder.  Either  at 
the  time  of  the  writing  of  the  policy  or  at  the  time  the  first 
dividend  is  payable  the  insured  makes  a  selection  which  re- 
mains effective  year  after  year  unless  a  change  be  requested. 
Where  no  selection  Is  made  there  Is  usually  an  automatic  pro- 
vision to  the  effect  that  the  dividend  shall  be  applied  as  a  net 
single  premium  to  purchase  paid-up  additions,  or  else  cash 
may  be  paid. 


118    INSURANCE  PRINCIPLES  AND  PRACTICES 

The  number  of  options  varies  with  the  companies,  the 
more  common  being  ( 1 )  to  take  the  dividend  in  the  form  of 
cash  or  apply  it  to  the  current  year's  premium,  (2)  to  pur- 
chase non-forfeitable  paid-up  additions  which  may  be  partici- 
pating or  non-participating  according  to  the  terms  of  the 
contract,  or  (3)  to  accumulate  at  a  fixed  rate  of  interest, 
withdrawable  at  the  policy-holder's  option,  or  in  some 
cases  on  policy  anniversary.  Other  choices  frequently  found 
are  ( 1 )  to  use  the  dividend  to  make  the  policy  one  that  is 
paid-up,  (2)  to  convert  the  existing  policy  into  an  endow- 
ment or    (3)    in  the  case  of  an  endowment  to  shorten  its  term. 


Chapter  IX 

INSURABLE  INTEREST,  THE  BENEFICIARY  AND 

ASSIGNMENT 

Description  of  insurable  interest. — When  an  application 
for  a  policy  is  received  by  an  insurance  company  it  is  not 
usually  granted  unless  there  is  evidence  of  the  "insurable  in- 
terest" of  the  applicant.  Such  an  interest  may  arise  from 
many  causes  but  three  general  groups  will  include  practically 
all  cases:  (1)  the  interest  of  a  person  in  his  own  life;  (2) 
an  interest  arising  from  "love  or  affection,"  i.e.,  through  blood 
or  marriage;  (3)  a  pecuniary  interest.  They  will  be  sepa- 
rately discussed  in  this  order. 

Interest  of  a  person  in  his  own  life. — One  of  the  impor- 
tant differences  between  life  insurance  and  other  forms  of  in- 
surance is  to  be  found  in  the  application  of  the  principle  of 
indemnity.  The  purpose  of  property  insurance  is  to  make 
good  the  loss  sustained.  Thus,  if  property  worth  $5,000  is 
destroyed  and  the  owner  has  a  fire  insurance  policy  for  $10,- 
000,  the  maximum  amount  that  will  be  paid  is  $5,000.  But 
in  life  insurance  the  courts  have  held  that  the  value  of  a  per- 
son's life  to  himself  is  incapable  of  determination;  therefore 
the  only  limits  to  recovery  are  the  maximum  amounts  which 
the  insurance  companies  will  accept.  This  view  leaves  us  in 
an  indefinite  position  and  it  would  seem  advisable  to  apply 
the  principle  of  the  "capitalization  of  a  human  life,"  i.e., 
capitalize  the  income  which  can  be  reasonably  anticipated 
if  life  continues  and'  purchase  a  policy  which  will  assure  the 
payment  of  such  a  sum  .  Furthermore,  it  is  not  by  any  means 
certain  that  the  courts  will  always  continue  their  present  atti- 
tude. 

Interest  of  a  relative. — This  refers  to  the  interest  which 
arises  through  "love  or  affection"  induced  by  blood  relation- 
ship or  marriage;  although  the  mere  fact  that  relationship 
exists  is  not  conclusive  evidence  that  an  insurable  interest  also 
exists.  Such  interest  is  presumed  in  the  case  of  husband  and 
wife,  and  usually  parent  and  child,  but  beyond  this  the  court 
decisions  indicate  that  some  expectation  of  pecuniary  gain  is 

119 


120    INSURANCE  PRINCIPLES  AND  PRACTICES 

necessary  in  order  to  make  the  interest  insurable.  It  should 
be  kept  in  mind,  however,  that  the  insured  who  takes  out  his 
own  policy  may  make  anybody  his  beneficiary.  The  pre- 
ceding discussion  applies  only  to  those  cases  where  one  person 
obtains  insurance  on  the  life  of  another. 

A  pecuniary  interest. — By  this  we  mean  the  interest  which 
one  person  (for  example,  a  creditor)  has  in  the  life  of  another 
(his  debtor)  when  the  continued  existence  of  the  debtor  prom- 
ises a  pecuniary  gain  to  the  creditor  and  when  the  debtor's 
premature  death  may  destroy  these  chances.  The  extent  of 
the  interest  of  a  creditor  is  limited  by  the  courts  and  has  been 
held  frequently  to  be  the  amount  of  the  debt  with  interest, 
plus  the  policy  premium  with  interest  thereon.  The  interest 
of  a  dependent  or  other  relative  who  has  an  expectation  of 
pecuniary  gain  is  included  here.  The  somewhat  humorous 
case  has  also  been  cited  of  the  interest  a  fiancee  has  in  her 
fiance,  i.e.,  an  anticipated  pecuniary  benefit  which  will  arise 
from  the  continued  life  of  the  person  insured. 

To  this  group  also  belong  the  interests  involved  in  the  so- 
called  "corporation  insurance"  and  "partnership  insurance." 
By  the  first  is  meant  the  interest  that  a  corporation  has  in  its 
employees,  particularly  in  the  highly-skilled  executives  whose 
death  may  mean  serious  loss  or  even  ruin.  In  the  case  of 
partnerships,  each  partner  has  an  interest  in  every  other  part- 
ner, since  the  death  of  a  valuable  member  of  the  firm  may 
cause  its  failure.  Furthermore,  the  withdrawal  of  capital 
that  may  ensue  upon  the  death  of  a  partner  may  place  the 
remaining  partners  in  a  perilous  financial  position.  The  ex- 
tent of  the  insurable  interest  in  either  of  these  two  latter 
examples  is  about  as  difScult  to  determine  as  the  amount  of 
insurable  interest  which  the  insured  has  in  his  own  life. 

The  justification  for  the  requirement  of  insurable  interest 
lies  largely  in  public  policy.  Without  such  a  requirement 
people  could  insure  one  another's  lives  indiscriminately  and 
the  contracts  would  be  largely  wager  contracts,  speculations 
on  the  probable  duration  of  an  individual's  life.  In  fact, 
such  policies  might  endanger  the  life  of  the  insured,  partic- 
ularly in  the  case  of  children. 

The  beneficiary  defined. — The  beneficiary  is  the  person  des- 
ignated in  the  policy  to  receive  the  proceeds  when  the  contract 
matures.  All  such  persons  must  have  an  insurable  interest, 
as  explained  in  the  preceding  section,  except  where  the  insured 


INSURABLE  INTEREST  121 

takes  out  his  own  policy  and  designates  some  person  or  per- 
sons other  than  his  estate  or  himself  as  beneficiary  or  bene- 
ficiaries. It  is  the  purpose  of  this  section  to  explain  the 
important  legal  effects  of  the  two  principal  methods  of  naming 
beneficiaries;  first,  with  the  right  of  revocation;  and  second, 
where  the  insured  does  not  reserve  the  right  to  change  the 
beneficiary. 

Reserving  the  right  to  change  the  beneficiary. — This  is  the 
method  most  commonly  used,  since  the  insured  is  certain  to 
retain  complete  control  of  his  policy.^  If  at  some  later  date 
he  sees  fit  to  select  another  beneficiary  there  is  nothing  to 
prevent  it,  since  the  only  right  the  existing  beneficiary  acquires 
is  an  "expectancy"  of  future  gain.  If,  for  instance,  the  in- 
sured desires  to  use  the  policy  as  security  for  a  debt  he  will 
have  no  trouble  in  changing  the  beneficiary,  although  it  should 
be  mentioned  that  a  better  method  to  protect  a  lender  is  to 
name  a  relative  as  beneficiary  and  then  to  assign  the  policy. 
It  should  be  further  added  that  some  companies  will  not  per- 
mit the  designation  of  a  beneficiary  whose  only  relationship 
is  that  of  creditor  but  require  the  method  just  mentioned. 
On  the  other  hand,  if  the  right  of  change  was  not  reserved  the 
assignment  is  not  possible  without  the  consent  of  the  bene- 
ficiary. As  an  illustration  of  the  policy  provision  covering 
this  point  the  following  is  cited:  "The  right  of  revocation 
reserved  by  the  insured.  When  the  right  has  been  re- 
served, the  insured  shall  have  full  power  while  this  policy  is 
in  force  (subject  to  any  previous  assignment)  to  change  the 
present  beneficiary  or  beneficiaries.  Such  change  shall  be  made 
in  writing  and  shall  be  valid  only  upon  its  endorsement  on  this 
policy  by  the  Company  at  the  Home  Office."  Various  word- 
ings to  the  same  effect  are  used  by  different  companies.^ 

While  the  advantages  of  this  method  are  ostensibly  con- 
clusive there  arc  some  very  serious  disadvantages.  In  case  of 
bankruptcy  the  creditors  have  been  permitted  to  attach  a  life 
insurance  policy  and  use  the  proceeds  for  their  protection. 
A  specific  exception  to  this  rule  is  found  in  the  National  Bank- 
ruptcy Act,  which  gives  a  bankrupt  the  right  to  pay  over  the 
cash  surrender  value  to  the  trustee,  but  failure  to  do  this 
within  thirty  days  of  the  ascertainment  of  the  amount  means 
that  the  entire  policy  passes  to  the  trustees. 

*  See  Appendix  III. 

*  See  Appendix  III. 


122    INSURANCE  PRINCIPLES  AND  PRACTICES 

Another  and  much  broader  protection  to  beneficiaries  is  by 
State  statute,  for  under  certain  conditions  the  laws  of  some 
States  prevent  creditors  from  obtaining  any  part  of  the  policy, 
not  even  the  cash  surrender  value.  These  conditions  usually 
are  found  where  a  wife  or  child  has  been  named  as  beneficiary; 
some  laws  going  so  far  as  to  include  dependent  relatives. 
However,  most  such  statutes  place  some  limitation  on  the 
amount  of  this  exemption  by  specifying  some  maximum  annual 
premium,  such  as  $500  in  the  State  of  New  York.  Contrasted 
with  this  in  Pennsylvania  no  limit  is  specified. 

Right  of  revocation  not  reserved. — When  the  insured  does 
not  reserve  the  right  of  revocation  the  beneficiary  obtains 
a  vested  interest  in  the  policy.  The  beneficiary  is  no  longer 
dependent  on  the  whims  of  the  insured  and  the  policy  is  not 
the  absolute  property  of  the  latter.  This  method  is  of  course 
of  greatest  advantage  to  the  beneficiary  because  the  insured 
cannot  assign  the  policy,  insert  another  beneficiary,  or  make 
any  change  without  the  written  consent  of  the  existing  bene- 
ficiary. The  further  advantage  of  this  method  is  that 
where  there  are  no  State  statutes  preventing  creditors  from 
taking  over  the  policy,  they  cannot  take  it  from  the  insured  if 
he  is  a  bankrupt,  due  to  the  vested  interest  of  the  beneficiary. 
The  principal  disadvantage  is  that  it  binds  the  insured,  al- 
though he  can  cease  the  payment  of  premiums.  Another  all 
too-common  illustration  of  the  disadvantage  of  this  method  to 
the  insured  appears  in  the  case  of  a  man  who  has  irrevocably 
named  his  wife  as  beneficiary  and  who,  after  having  paid  a  con- 
siderable sum  in  the  form  of  premiums,  becomes  estranged 
from  her  or  divorced.  He  then  usually  does  not  desire  her  to 
receive  any  benefits  under  the  policy  but  is  powerless  to  do 
more  than  cease  paying  premiums. 

Purpose  of  assignment. — Among  the  numerous  uses  of  life 
insurance  is  its  use  as  security  for  a  debt.  Sometimes  a  debt 
is  the  original  cause  for  obtaining  the  insurance  but  more 
often  the  opportunity  to  make  use  of  the  policy  as  collateral 
arises  after  it  has  been  issued.  In  either  instance  assignment 
seems  to  be  the  best  method  of  accomplishing  the  desired 
result. 

Where  the  policy  is  primarily  secured  to  protect  a  creditor, 
it  is  a  matter  of  expediency  to  name  as  beneficiary  some  per- 
son with  whom  the  insured  has  more  than  a  business  relation- 
ship, because  of  the  probable  changes  in  the  amount  of  the 


INSURABLE  INTEREST  123 

debt  without  any  corresponding  change  in  the  face  of  the 
policy.  Furthermore,  some  companies  require  it.  If  the 
creditor  is  named  as  beneficiary  he  will  receive  the  full  amount 
of  the  policy  if  the  insured  dies,  and  if  the  debt  has  been  de- 
creased in  the  meantime  he  may  receive  more  than  his  due. 
The  best  method  to  prevent  this  is  for  the  insured  to  name 
a  specific  beneficiary,  such  as  his  wife,  and  make  an  assign- 
ment to  the  creditor  "as  his  interest  may  appear."  Thus  any 
possibility  of  excess  payment  being  made  to  an  outsider  is  ob- 
viated, since  the  equity  of  the  assignee  will  be  limited  to  his 
interest,  and  if  there  is  a  balance  it  will  revert  to  the  bene- 
ficiary, who  presumably  will  be  a  member  of  the  family. 

Method  of  assignment. — Unlike  fire  insurance  policies, 
there  is  no  special  form  attached  to  life  insurance  policies  for 
the  purpose  of  assignment.  No  particular  wording  is  needed 
to  accomplish  the  assignment  as  long  as  it  is  sufficiently  defi- 
inite  to  establish  a  legal  claim,  although  as  a  matter  of  accom- 
modation and  uniformity,  the  insurance  companies  usually 
furnish  forms  upon  request.^  They  do  not,  however,  assume 
any  responsibility  as  to  the  legality  or  effect  of  the  assignment 
and  furthermore  will  not  be  bound  to  an  assignment  until  it 
is  on  file  at  a  designated  office.  This,  however,  does  not 
mean  that  the  consent  of  the  insurance  company  is  necessary 
as  in  the  case  of  a  fire  policy. 

When  the  policy  is  obtained  with  a  view  to  protecting  a  cred- 
itor complications  can  be  avoided  if  proper  care  is  taken, 
but  where  an  attempt  is  made  to  assign  a  policy  which  has 
been  in  force  for  some  time  and  already  has  a  large  surrender 
value,  difficulties  are  frequently  encountered.  Thus  if  the  in- 
sured has  named  a  beneficiary  without  right  to  change,  written 
consent  must  be  obtained  from  the  beneficiary.  This  is  some- 
times impossible.  It  should  be  added  that  companies  some- 
times request  the  consent  of  the  beneficiary  even  if  the  right 
to  change  has  been  reserved  by  the  insured.  Further  compli- 
cations are  invited  when  an  assignee  attempts  to  assign  a  policy 
because  the  company  may  have  a  lien  against  the  policy  of 
which  the  creditor  is  not  aware  and  it  is  a  well-established 
rule  that  the  assignee  can  only  receive  those  rights  which 
the  assignor  possesses  at  the  time  of  assignment,  even  though 
a  new  contract  exists  between  the  company  and  the  assignee 
beginning  with  the   date  the  company   approves  the   assign- 

'  See  Appendix  VIII. 


124    INSURANCE  PRINCIPLES  AND  PRACTICES 

ment.  Then,  too,  State  statutes  sometimes  make  certain  re- 
strictions, particularly  where  a  beneficiary  who  is  a  dependent 
relative  assigns  his  or  her  rights.  In  fact,  the  assignment 
by  an  assignee  is  something  to  be  avoided,  if  possible,  since 
the  policy  is  not  a  negotiable  instrument  and  unforeseen 
legal  difficulties  may  be  encountered.  Formalities  are  some- 
times required  for  an  assignment.  If  the  assignment  is  made 
by  a  corporation  it  is  customary  for  the  insurer  to  require 
a  copy  of  the  minutes  of  the  Board  of  Directors  authoriz- 
ing the  assignment,  in  addition  to  a  copy  of  the  assignment 
itself. 

When  the  obligation  for  which  the  policy  has  been  assigned 
is  discharged,  it  is  advisable  to  secure  a  "release  of  interest"* 
and  file  it  with  the  insurance  company.  The  reason  for  this 
is  that  while  policies  are  usually  placed  In  the  hands  of  the 
assignee,  the  courts  have  held  that  such  possession  is  not  es- 
sential. Consequently  the  possession  of  the  policy  by  the  In- 
sured is  not  conclusive  evidence  that  the  obligation  has  been 
discharged.  A  "release  of  interest,"  however,  will  prevent 
legal  difficulties. 

The  application. — The  first  step  In  securing  a  policy  Is  to 
fill  out  an  application.  This  Is  usually  divided  into  two  parts. ^ 
The  first  part  relates  to  the  amount  and  kind  of  policy,  the 
premium,  the  age  of  the  applicant,  the  amount  of  other  Insur- 
ance carried,  etc.  The  second  is  used  In  connection  with  the 
medical  examination  and  In  addition  to  a  statement  of  the 
results  of  the  examination  by  a  physician,  questions  must  be 
answered  by  the  applicant  regarding  his  health,  his  habits  and 
his  family  history.  Some  of  the  statements  thus  set  forth 
are  deemed  warranties  and  some  representations.  If  the  state- 
ment is  a  warranty  Its  untruth  or  violation  is  sufficient  to  void 
the  policy.  If  It  Is  a  representation  the  policy  will  not  be 
voided  unless  the  statement  was  material  to  the  risk.  The  ef- 
fect of  such  warranties  has  been  mitigated  In  two  ways.  First, 
many  States  have  passed  laws  to  the  effect  that  In  the  absence 
of  fraud  all  statements  shall  be  considered  as  representations. 
Secondly,  an  "Incontestable  Clause"  has  been  added  to  the 
policy.  This  is  usually  to  the  effect  that  the  policy  is  incon- 
testable by  the  company  after  the  policy  has  been  in  force  for 
one  year,  except  for  non-payment  of  premium. 

*  See  Appendix  X. 

'  See  Appendices  I  and  II. 


INSURABLE  INTEREST  125 

Settlement  of  claims. — Settlement  of  policy  claims  arises 
in  four  ways : 

1.  Surrender. — This  is  when  the  insured  surrenders  his  pol- 
icy to  the  company  for  the  cash  value.  All  parties  interested 
in  the  policy  usually  have  to  sign  a  form  requesting  the  cash 
value. 


6 


2.  Matured  Endozvments. — It  is  customary  for  the  com- 
pany to  send  notice  to  the  insured  at  the  maturity  of  the  en- 
dowment, whereupon  he  files  a  statement  to  the  effect  that 
he  is  still  living  and  the  company  pays  the  proceeds  to  him. 
With  the  exception  of  corporation  and  partnership  insurance 
the  beneficiary  seldom  has  any  interest  in  the  endowment 
feature. 

3.  Death. — When  the  insured  dies  it  is  necessary  that  the 
company  be  notified.  Then  with  the  assistance  of  a  company 
representative  the  "Proofs  of  Death"^  are  made  out  and  filed 
with  the  company.  As  soon  as  approved  the  claim  will  be 
paid.  It  should  be  added  that  a  notification  or  request  for 
payment  is  not  a  claim  until  the  proof  of  death  has  been  re- 
ceived. Therefore,  when  a  company  says  that  all  its  claims 
are  paid  within  one  day,  it  means  one  day  after  receipt  of 
proof  of  death  and  not  one  day  after  death. 

4.  Anmiities. — The  payment  of  an  annuity  begins  at  a  fixed 
date  which  may  be,  as  previously  stated,  either  immediate  or 
deferred.  The  company  may  require,  at  the  time  of  any  peri- 
odical payment,  evidence  that  the  insured  is  still  alive. 

'  See   Appendix   XI. 

^  See  Appendices  XII  and  XIII. 


Chapter  X 

SPECIAL  FORMS  OF  LIFE  INSURANCE 

Fraternal  insurance — History  and  description. — Fraternal 
insurance  is  possibly  the  oldest  form  of  life  insurance  and  its 
origin  may  be  traced  back  many  centuries  to  the  time  when 
organizations  were  first  formed  for  mutual  benefit.     While 
these  historic  unions  and  guilds  never  applied  the  word  "in- 
surance" to  their  operations,  they  nevertheless  performed  the 
functions  associated  with  the  name.      In  the  United  States  the 
growth  of  fraternals  for  the  purpose  of  insurance  has  been 
parallel  with  that  of  the  old  line   (legal  reserve)    insurance 
companies   and  today,   while  they  have  not  nearly  so  much 
insurance  in  force  as  the  latter  companies,  they  have  enormous 
memberships.      Most  of  this  growth  has  taken  place  during 
the  last  half  century,  for  it  was  not  until  after  the  Civil  War 
that  the  really  phenomenal  increase  took  place.     One  of  the 
chief  reasons  for  this  was  the  fact  that  the  legal  reserve  com- 
panies had  just  entered  upon  their  period  of  expansion,  fur- 
nishing great  stimulus  to  the  fraternals.     The  fraternals  sup- 
plied keen  competition  although  their  schemes  were  then  often 
based  on  fallacious  arguments.       They  maintained  that  the 
legal  reserve  companies  were  charging  a  high  level  premium, 
much  larger  than  current  mortality  costs   and  including  an 
clement  of  reserve,  but  that  since  the  average  age  of  member- 
ship and  average  death  rate  did  not  change  much,  year  after 
year,  this  reserve  was  unnecessary.     Therefore  all  they  would 
collect  from  their  members  was  the  average  annual  cost.     At 
first  sight  this  seemed  quite  a  plausible   argument  because  it 
was  commonly  observed  that  the  average  age  was  constant  in 
a  given  community.     While  this  was  true  of  a  particular  lo- 
cality because  births  and  deaths  balanced  each  other,  it  did 
not  necessarily  apply  to  individual  groups  and  associations  in 
the  community.     Consequently  as  the  members  grew  older  the 
probability  of  death  increased  rapidly.     These   increases  in 
the  rate  of  mortality  soon  had  many  of  the  societies  in  finan- 
cial difficulty  and  they  were  then  compelled  to  cut  down  their 
benefits  and  in  many  cases  to  dissolve. 

126 


SPECIAL  FORMS  OF  LIFE  INSURANCE     127 

The  stronger  of  these  associations,  however,  were  able  to 
pull  through  by  increasing  their  rates,  a  measure  made  pos- 
sible only  by  the  nature  of  their  organization.  Having  been 
founded  on  the  basis  of  fraternal  spirit,  the  members  often 
felt  that  they  were  united  by  a  bond  stronger  than  one  of  mere 
financial  relationship  and  stood  by  their  brothers  through 
financial  difficulty.  In  this  type  the  social  feature  was  nearly 
as  important  as  the  benefits.  Usually  such  fraternals  were 
organized  on  the  lodge  principle,  with  local  chapters  acting 
under  the  supervision  of  a  superior  lodge  or  lodges  which  were 
State  or  national  in  character. 

It  was  this  better  type  of  fraternals  just  described  that  was 
able  to  exist,  and  the  sounder  of  them  formed  the  National 
Fraternal  Congress.  This  organization  constructed  a  table 
of  mortality  from  their  combined  experience  and  called  it  the 
National  Fraternal  Congress  Table.  Recognizing  their  de- 
ficiencies, they  attempted  to  induce  all  similar  societies  to  con- 
form to  a  reserve  basis  as  ascertained  by  this  table.  Oppo- 
sition was  met  in  the  form  of  an  association  of  the  weaker 
fraternals,  and  no  common  agreement  could  be  made  to  sat- 
isfy all.  This  agitation  led  to  the  so-called  "Mobile  Bill," 
formulated  by  the  insurance  commissioners  at  a  convention  in 
Mobile.  The  "New  York  Conference  Bill,"  which  is  a  modi- 
fication of  the  "Mobile  Bill,"  has  been  adopted  by  many 
States.  These  laws  induce  the  fraternals  to  come  over 
to  the  legal  reserve  basis.  However,  they  do  not  use  the 
American  Experience  Table  as  a  basis  for  calculating  the  re- 
serves required  but  allow  the  fraternals  to  use  the  table  made 
from  their  own  experience.  An  exception  to  this  is  where  the 
American  Table  is  specified  by  law  as  the  measure  of  the  re- 
serve in  order  to  determine  whether  a  fraternal  can  grant  loan 
and  cash  values. 

Their  combined  experience  as  shown  in  the  National  Fra- 
ternal Congress  Table  does  not  coincide  exactly  with  the 
American  Experience  Table  and  their  reserves  are  smaller. 
Many  are  still  confronted  with  the  problem  of  bringing  the 
reserves  up  to  an  adequate  basis  and  under  some  recent  State 
laws  this  must  be  accomplished  in  a  given  time.  Until  this  is 
completed  they  may  find  it  necessary  to  charge  rather  large 
premiums  and  it  should  be  added  that  in  the  process  of  rec- 
tifying the  errors  of  the  past  many  have  fallen  by  the  wayside. 
The  reason  for  this  is  more  apparent  when  it  is  realized  that 


128    INSURANCE  PRINCIPLES  AND  PRACTICES 

the  old  line  companies  hold  approximately  twelve  times  as 
much  reserve  per  $1  of  Insurance  In  force  as  do  the  fraternals. 

Differences  between  fraternal  and  old  line  insurance. — The 
idea  that  a  reserve  was  necessary  has  always  been  the  chief 
difference  between  the  old-line  companies  and  the  fraternals, 
but  on  this  point  they  are  now  a  unit/  Some  other  differences 
still  exist,  however,  and  should  be  mentioned.  The  fraternals 
grant  a  "benefit  certificate"  or  "life  certificate"  In  place  of 
a  policy,  the  latter  being  a  long-term  contract  with  a  fixed 
premium  wherein  the  company  Is  bound  but  the  Insured  Is  not. 
The  certificate  specifies  that  the  benefits  are  dependent  not 
only  on  payment  of  dues  but  upon  compliance  with  the  by- 
laws and  constitution  of  the  society,  and  members  are  not  al- 
ways assured  that  there  will  be  no  change  in  the  premium. 
Other  usual  restrictions  are  that  only  relatives  may  be  named 
as  beneficiaries,  and  assignment  to  persons  outside  of  this  group 
Is  prohibited. 

Nevertheless,  there  is  nothing  Inherently  wrong  with  fra- 
ternal Insurance  and  Its  future  possibilities  arc  very  great. 
This  is  true  more  especially  since  they  have  been  reconciled'  to 
a  scientific  basis.  Under  Intelligent  and  efficient  management 
they  have  lower  expenses  than  the  regular  commercial  com- 
panies because  there  are  no  agents'  commissions  and,  fre- 
quently, no  medical  examination.  A  further  advantage  Is 
that  a  fraternal  bond  tends  to  hold  the  society  together  and 
thus  reduce  lapses.  In  view  of  these  conditions  we  can  ex- 
pect the  stronger  organizations  to  grow  and  become  larger 
and  better  than  ever,  and  as  long  as  the  spirit  of  fraternalism 
is  extant  the  old-line  companies  will  meet  with  plenty  of  com- 
petition. 

Assessment  insurance. — Assessment  insurance  furnishes 
glaring  Illustrations  of  the  fallacies  which  have  been  prevalent 
in  regard  to  Insurance.  This  form  of  Insurance  differs  but 
slightly  from  the  former  fraternal  system;  In  fact  many 
fraternals  have  used  It.  But  Its  most  extensive  use  has  been 
by  organizations  formed  for  the  purpose,  and  by  the  so-called 
business  assessment  associations,  which  usually  confine  their 
membership  to  particular  trades.  The  earliest  assessment 
plan  was  where  each  and  every  member  was  assessed  a  flat 
amount,  so  that  the  total  collected  was  just  sufficient  to  meet 
the  current  costs,  collections  being  made  each  time  a  member 

*Sce  Appendix  XIV. 


SPECIAL  FORMS  OF  LIFE  INSURANCE     129 

died.  If  this  be  applied  to  any  one  group,  it  is  equivalent  to 
the  one-year  term  policy  on  the  increasing  step-rate  plan. 
The  objection  mentioned  in  a  previous  chapter  (Chap.  VI) 
concerning  the  one-year  term  with  an  increasing  rate  applies 
to  assessment  insurance  with  equal  force,  i.e.,  the  rate  at 
the  older  ages,  because  of  the  greater  number  of  deaths,  rises 
so  rapidly  and  to  such  an  amount  that  it  is  prohibitive.  The 
other  and  more  Important  objection  is  that  the  members 
fail  to  live  up  to  their  agreements.  This  will  be  better  un- 
derstood by  an  explanation  of  how  the  method  worked  out. 

Where  organizations  used  the  assessment  scheme,  the  as- 
sumption was  that  the  young  members  would  counterbalance 
the  older,  which  in  fact  did  not  occur.  The  discrepancy  be- 
tween similar  premiums  and  dissimilar  ages  soon  became  ob- 
vious. The  younger  men  would  see  the  mounting  costs  caused 
by  the  older  members  and  either  not  enter  or  drop  out  and 
join  a  group  with  younger  lives  and  lower  costs.  So,  fre- 
quently, all  the  young  blood  would  disappear  and  there  would 
be  nothing  left  but  numerous  old  members  and,  in  consequence, 
a  rapidly  soaring  mortality  cost.  Eventually  this  would  be- 
come unbearable  and  the  society  would  end. 

A  modification  of  the  flat  assessment  was  to  scale  It  on  the 
basis  of  the  attained  age  at  entry.  While  this  was  a  slight 
improvement,  It  only  postponed  the  inevitable.  Another  at- 
tempt to  stave  off  the  approaching  difficulty  was  to  collect  the 
assessment  In  advance;  but  this  merely  delayed  the  imposition 
of  extra  charges.  Although  the  plan  is  now  in  disfavor,  it 
Is  by  no  means  extinct.  A  number  of  fraternals  still  use  the 
system  In  their  local  lodges,  as  do  some  of  the  business  as- 
sessment societies. 

Industrial  insurance — Origin  and  purpose. — Industrial  In- 
surance was  first  Introduced  into  the  United  States  in  1875, 
having  had  its  origin  in  the  recommendations  of  a  Parliamen- 
tary Committee  investigating  insurance  for  the  working  classes 
in  England,  about  1854.  This  Committee  found  that  wage- 
earners  really  were  in  greater  need  of  insurance  than  the  class 
of  people  who  were  already  insured  but,  owing  to  the  system  of 
premium  payments,  the  more  humble  working  man  was  un- 
able to  take  advantage  of  the  existing  plan.  Trade  guilds, 
burial  clubs  and  some  fraternals  were  available  to  him,  but 
these  were  not  managed  on  a  scientific  basis  and  their  suc- 
cess depended  largely  on  the  ability  and  willingness   of  the 


130    INSURANCE  PRINCIPLES  AND  PRACTICES 

members  to  pay.  The  result,  of  course,  was  not  satisfactory, 
as  financial  adversity  often  relieved  members  of  their  sense  of 
responsibility  and  failure  followed.  To  solve  these  difficul- 
ties it  was  suggested  that  insurance  companies  conducted  on  a 
scientific  reserve  basis  provide  ordinary  insurance  for  the 
masses  by  charging  a  weekly  permium  and  sending  a  personal 
representative  of  the  company  to  collect  it.  This  plan  was 
attempted  by  several  companies  and  the  results  were  most 
gratifying.  Its  extension  into  other  countries.  Including  the 
United  States,  followed,  and  it  has  met  everywhere  with 
practically  the  same  success.  In  the  United  States  Its  growth 
has  been  phenomenal;  in  less  than  a  half  of  century  It  has 
grown  until  it  now  involves  over  forty  million  policies  with 
a  face  value  of  about  six  billions  of  dollars. 

The  system  explained. — Practically  the  same  policies  that 
are  written  In  the  ordinary  business  are  included  In  the  in- 
dustrial plan,  i.e.,  ordinary-life,  limited-payment,  endowments, 
etc.  Guaranteed  values,  paid-up  Insurance,  extended  insur- 
ance, and  cash  and  loan  values  are  also  granted. 

However,  there  are  some  Important  differences,  which  are 
described  below: 

1.  Medical  Examination. — This  has  been  found  to  be  very 
costly  when  compared  with  the  size  of  the  average  Indus- 
trial policy.  Consequently  either  the  agent  or  superintendent 
makes  a  report  as  to  the  health  of  the  person  to  be  Insured 
and  this  is  used  as  the  basis  of  acceptance  or  rejection.  Oc- 
casionally, if  the  size  of  the  policy  warrants,  a  medical  exam- 
ination is  given. 

2.  Insurance  on  children. — Children  are  accepted  under  this 
plan  for  a  limited  amount,  although  as  the  child  grows  older 
the  amount  may  be  increased  In  accordance  with  special  infan- 
tile tables  constructed  for  the  purpose.  It  might  be  men- 
tioned that  the  child's  endowment  is  a  very  popular  policy  in 
this  type  of  business. 

3.  Size  of  Policy. — The  size  of  the  industrial  policy  aver- 
ages less  than  $200.  However,  it  is  not  customary  to  express 
the  amount  of  an  Industrial  policy  by  Its  face  value,  but  rather 
by  the  weekly  premium.  I.e.,  3-,  5-,  10-,  15-cent  policy,  etc. 

4.  The  Premium. — The  premium  differs  both  in  the  manner 
of  payment  and  the  annual  cost  per  $1,000  of  insurance.^ 

a.  Marnier  of  payment. — In  place  of  sending  the  premium 

°  See  Appendix  VII. 


SPECIAL  FORMS  OF  LIFE  INSURANCE      131 

to  a  designated  office  an  agent  calls  once  a  week  to  collect  it. 
In  order  to  do  this  the  industrial  companies  maintain  a  very 
large  force  of  agents,  supervised  by  a  superintendent  or  assis- 
tant superintendent  who  has  charge  of  a  specified  territory. 
The  agents  are  given  a  "debit,"  which  is  the  total  amount  of 
weekly  premium  collections  they  are  to  make.  In  addition  to 
this  they  are  supposed  to  solicit  new  business,  prevent  lapses, 
and  promote  the  interests  of  the  company.  The  remunera- 
tion is  usually  a  commission  on  the  weekly  collections  and  the 
new  business  written. 

b.  Cost  per  $1,000  of  Insurance. — The  cost  is  consider- 
ably higher  than  for  ordinary  insurance,  due  principally  to  the 
expense  of  collecting  the  premium  and  the  higher  rate  of  mor- 
tality among  industrial  workers.  The  system  previously  ex- 
plained for  premium  collection  Is  expensive,  but  it  has  been 
learned  by  experience  that  as  far  as  wage  earners  are  con- 
cerned premiums  must  be  collected  by  a  personal  representa- 
tive and  at  frequent  intervals. 

The  higher  mortality  rate  among  this  class  of  people  has 
been  the  subject  of  much  Investigation  and  special  tables  have 
been  constructed  after  a  detailed  analysis.  It  has  been  found 
in  these  analyses  that  the  chief  causes  for  the  higher  mortality 
are  unsanitary  homes,  inadequate  food,  hard  work,  close  con- 
finement, necessary  exposure,  lack  of  best  medical  skill,  atten- 
tion secured  only  In  the  last  emergency  and  ignorance  of  the 
simplest  laws  of  hygiene. 

5.  Deferred  Benefits. — It  Is  sometimes  provided  that  if 
death  occurs  during  the  first  six  months  of  the  policy  only  one- 
half  of  the  face  of  the  policy  will  be  paid.  In  the  case  of 
policies  on  children  the  face  is  frequently  on  an  ascending 
scale,  and  as  the  child  grows  older  the  amount  of  the  insurance 
increases,  although  the  premium  remains  the  same. 

Advantages  of  industrial  insurance. — That  Industrial  Insur- 
ance is  a  necessity  there  can  be  no  doubt,  even  though  it  has 
been  frequently  subjected  to  severe  criticisms.  These  objec- 
tions refer  principally  to  the  high  cost  and  alleged  extrava- 
gance, which  are  far  outweighed  by  the  following  advantages : 

1.  The  wage-earner  is  able  to  secure  Insurance  protection. 

2.  The  system  of  weekly  payments  Inculcates  ideas  of  saving 
and  thrift. 

3.  When  a  bread  winner  dies  his  family  Is  not  so  apt  to  be- 
come a  public  charge  on  the  community. 


132    INSURANCE  PRINCIPLES  AND  PRACTICES 

4.  Poverty  and  suffering  of  dependent  famlHcs  is  materially 
reduced. 

5.  Causes  of  the  higher  mortality  rate  (previously  men- 
tioned) are  analyzed  and  recommendations  are  made  explain- 
ing how  to  reduce  the  high  mortality. 

6.  Communities  where  policy-holders  are  numerous  are  fre- 
quently furnished  with  a  nurse  and  a  company  physician  is 
designated.  Their  services  are  available,  free  of  cost,  to 
persons  who  are  Insured  by  the  company.  It  has  been  found 
that  such  service  more  than  pays  for  itself. 

Group  insurance — Nature  of  the  plan. — Group  insurance, 
as  it  exists  today,  is  of  recent  origin,  and  may  be  defined  as  the 
coverage  of  a  number  of  Individuals  by  means  of  a  single 
or  blanket  insurance  policy.  This  type  of  contract,  from  its 
very  nature,  has  been  applied  to  the  employees  of  Industrial 
concerns,  where  the  employer  assumes  the  responsibility  for  the 
payment  of  the  premium,  it  having  been  found  Impractical  to 
grant  insurance  on  a  group  without  having  some  central  re- 
sponsibility. 

Since  1911,  when  the  first  policy  of  this  kind  was  written, 
its  popularity  has  grown  with  remarkable  rapidity,  until  now 
we  find  many  companies  with  separate  departments  purposely 
created  to  handle  group  Insurance.  In  addition,  the  field  of 
group  insurance  has  been  extended.  At  first  only  Insurance 
promising  payment  in  case  of  death  was  written  but  now 
various  types  of  policies,  including  limited-payment  life  and 
endowment  policies,  as  well  as  accident  and  health  insurance 
and  old  age  annuities,  are  sold  under  the  group  contract.  In 
other  words,  practically  the  entire  field  of  life  insurance  is 
covered  by  group  policies,  although  the  contract  most  com- 
monly used  Is  the  one-year  renewable  term. 

Method  of  insuring  a  group. — When  an  employer  desires 
to  insure  his  employees  he,  or  the  insurance  company  repre- 
sentative, fills  out  a  preliminary  inspection  blank.  This  form 
describes  the  occupation  of  the  various  employees,  the  build- 
ings, fire  protection,  sanitary  conditions,  drinking  water,  oc- 
cupation of  the  various  employees,  and  states  the  average  age, 
sex,  and  whether  the  employees  are  examined  regarding  health, 
etc.  On  the  basis  of  this  a  tentative  rate  may  then  be  quoted 
and  the  employer  files  his  application  and  a  promise  to  pay  the 
premium,  along  with  the  individual  applications  of  each  of  the 
employees  to  be  included  In  the  group.     The  insurance  com- 


SPECIAL  FORMS  OF  LIFE  INSURANCE     133 

pany  then  makes  a  complete  survey  of  the  entire  plant  and  its 
surroundings  and  quotes  a  final  rate.  All  arrangements  hav- 
ing been  made  and  the  premium  paid,  the  policy  is  delivered 
to  the  employer  and  each  employee  receives  a  certificate  of  in- 
surance. When  a  loss  occurs  the  proceeds  are  usually  paid 
directly  to  the  employer  and  he  pays  the  beneficiary  named  In 
the  policy.  An  exception  to  this  is  where  the  State  laws  compel 
payments  to  be  made  direct  to  the  beneficiary. 

Factors  affecting  the  group  premium. — The  computation 
of  the  premium  that  is  quoted  is  based  on  numerous  factors. 
They  can,  however,  be  divided  into  two  groups;  (1)  those 
elements  which  are  primary  to  all  insurance  contracts,  such 
as  the  amount  of  the  policy,  the  kind  of  policy  and  the  ages 
concerned  and  (2)  those  which  are  secondary  or  miscellan- 
eous, i.e.,  which  may  or  may  not  affect  the  particular  contract. 

1.  Primary  factors.  One  of  the  most  important  items  is 
the  amount  of  insurance.  Each  employer  has  his  own  par- 
ticular problem  to  solve  and  so  the  face  values  of  the  ploicies 
vary  considerably;  but  most  contracts  are  on  one  of  the  follow- 
ing bases : 

a.  Same  amount  for  each  employee. 

b.  An  amount  based  on  length  of  employment,  starting  at 
a  certain  minimum  and  increasing  yearly  to  a  certain  maxi- 
mum; e.g.,  $500  minimum  and  increasing  $100  each  year  until 
it  reaches  $1,000. 

c.  An  amount  equal  to  the  annual  wage  of  an  employee  or 
a  percentage  thereof. 

Regardless  of  the  method  adopted,  it  is  customary  to  have 
a  waiting  period  of  from  three  months  to  one  year.  This, 
obviously,  is  to  eliminate  "floaters."  It  might  be  mentioned 
here  that  the  third  method  is  possibly  the  most  satisfactory. 

The  kind  of  policy  may  be  any  one  of  those  described  pre- 
viously or  a  combination  of  life,  accident,  and  health.  The 
usual  policy,  however.  Is  for  Insurance  covering  loss  of  life 
only,  for  the  term  of  one  year.  While  we  have  found  this 
impractical  In  Individual  Insurance  it  works  very  well  In  a 
group,  since  the  contracts  usually  specify  a  minimum  and  max- 
imum entering  age  and  the  employees  usually  maintain  an  av- 
erage age  which  Is  comparatively  low.  This  is  due  to  the 
entrance  of  the  young  and  the  retirement  of  the  old,  the  re- 
sult being  an  almost  stationary  age.  This,  however,  does 
not  allow  the  premium  to  be  calculated  on  the  basis  of  the 


134    INSURANCE  PRINCIPLES  AND  PRACTICES 

average  age.  While  the  average  age  would  be  thirty-five 
if  half  of  the  group  were  age  20  and  the  other  half  were 
age  50,  thirty-five  could  not  be  used  as  the  basis  of  calcula- 
tion. This  is  because  the  rate  of  death  is  much  lower  at  age  ZS 
than  the  average  of  death  rates  at  20  and  50  and  the  premium 
would  thus  be  too  low.  Consequently  the  premium  is  figured  on 
every  individual  employee  of  the  concern  and  then  totaled. 
From  this  may  be  obtained  the  average  premium,  which  will  be 
somewhat  higher  than  the  rate  for  the  average  age.  How- 
ever, the  rate  so  ascertained  will  in  all  probability  remain  about 
the  same  year  after  year  if  the  labor  turnover  is  not  abnormal. 
Thus,  for  an  average  corporation  the  annual  premium  each 
year  on  a  one-year  renewable  term  policy  is  about  1^4  P^r 
cent,  of  the  total  amount  of  insurance. 

2.  Secondary  factors  that  tend  to  vary  the  rate. 

a.  Possibly  one  of  the  most  important  is  the  question  of 
medical  examination.  An  assumption  in  group  insurance  is  that 
a  large  enough  number  will  be  covered  so  that  no  medical  ex- 
amination is  necessary.  The  insurance  company,  by  accepting 
only  those  who  are  actively  engaged  in  the  employ  of  a  com- 
pany, and  then  in  groups  of  not  less  than  fifty  or  one  hundred, 
limited  to  age  15  or  16  as  the  minimum  and  to  age  SS  or  60  as 
the  maximum,  automatically  eliminates  the  type  of  person 
which  causes  a  high  death  rate. 

This  point  has  been  the  subject  of  strongest  attack  on  group 
contracts  as  a  plan  of  insurance,  it  being  argued  that  the  in- 
surance company  by  this  method  would  be  subjected  to  an  ad- 
verse mortality  selection.  This  has  not  been  borne  out  by 
experience  and  it  is  doubtful  If  it  ever  will  be.  As  a  matter 
of  fact,  it  has  often  been  said  that  if  an  insurance  company 
would  insure  the  lives  of  all  the  persons  walking  past  a  given 
street  corner,  it  could  dispense  with  medical  examinations. 

Where  the  nature  of  the  group  is  difficult  to  ascertain  by 
a  general  survey  the  entire  group  may  be  given  a  medical  ex- 
amination, and  if  found  to  be  inferior,  may  be  rejected  or 
rated  up.  In  the  same  manner,  if  there  are  unusual  dangers 
attached  to  the  occupation  or  if  the  locality  is  unhealthy,  an 
additional  loading  may  be  put  on  the  premium.  This  should 
be  allocated  evenly  over  the  entire  group,  regardless  of  age. 

b.  Another  factor  that  may  cause  a  higher  premium  is  the 
presence  of  the  conversion  privilege.  Some  policies  permit 
the  employee  to  convert  the  policy  into  an  individual  contract 


SPECIAL  FORMS  OF  LIFE  INSURANCE     135 

for  the  same  amount  of  insurance  in  case  he  separates  from 
the  concern  that  was  paying  his  premium.  If  this  privilege  is 
exercised  within  a  certain  period  no  medical  examination  is 
necessary  in  most  cases.  The  presence  or  absence  of  this  priv- 
ilege often  indicates  whether  the  employer  has  adopted  group 
insurance  as  a  selfish  method  of  controlling  his  labor  or 
largely  for  humanitarian  reasons. 

c.  An  accident  and  health  clause  is  sometimes  endorsed  on 
these  policies  and  an  extra  premium  must  be  charged  for  this. 
It  should  be  mentioned  that  many  separate  group  policies  cov- 
ering accident  and  health  only  are  now  being  written. 

d.  Group  insurance  may  be  participating  or  non-participa- 
ting, and  this  will  also  affect  the  premium.  The  participating 
insurance  usually  has  an  unchangeable  premium  for  an  in- 
definite period  but  is  subject  to  refunds  if  the  experience  is 
favorable.  While  the  non-participating  policy  will  have  a 
lower  premium,  the  rate  will  be  guaranteed  for  a  limited  time 
only. 

Advantages  of  group  insurance. — The  advantages  of  group 
insurance  are  many  but  may  be  classified  as  they  apply  to  the 
group,  the  employer,  and  the  community. 

1.  The  Group. — Group  insurance  is  not  intended  as  a  sub- 
stitute for  individual  insurance,  but  merely  as  a  supplement. 
However,  it  has  been  found  that  approximately  40  per  cent, 
of  industrial  workers  carry  no  protection  and  group  insur- 
ance most  ably  meets  this  urgent  need.  As  previously  men- 
tioned, a  medical  examination  is  seldom  required,  and  this  re- 
sults in  many  persons  obtaining  insurance  who  could  not  obtain 
individual  policies.  It  should  not  be  concluded  that  the  40  per 
cent  referred  to  are  individually  uninsurable,  as  the  larger  part 
of  them  could  secure  policies  if  they  so  desired.  Thus  group 
insurance  renders  a  great  benefit  to  the  individuals  of  the  group 
and  more  especially  to  the  dependents  of  those  who  arc  negli- 
gent of  their  responsibilities. 

2.  The  employer. — The  employer  is  really  the  one  to  whom 
the  contract  is  sold  and  there  are  many  inducements  from 
his  standpoint,  although  as  the  number  of  group  policies  in- 
crease, the  advantages  to  the  individual  employer  decrease. 
Nevertheless,  he  usually  buys  insurance  for  one  or  more  of 
the  following  reasons : 

a.  Gives  him  publicity  and  advertising. 

b.  Attracts  efficient  labor. 


136    INSURANCE  PRINCIPLES  AND  PRACTICES 

c.  Creates  a  better  feeling  between  him  and  his  employees. 

d.  Reduces  labor  turnover. 

e.  Where  the  insurance  is  based  on  an  annual  wage  it  sup- 
plies a  stimulus  for  higher  efficiency. 

f.  Makes  better  workers  by  alleviating  distress  among 
employees  and  their  families. 

3.  The  community — The  burden  of  caring  for  an  insured 
employee's  family,  instead  of  falling  on  the  community,  is  car- 
ried by  an  efficient  organization.  Much  suffering  and  misery  is 
in  this  manner  prevented  and  the  community  becomes  a  much 
better  one  in  which  to  live. 

Consequently  group  insurance  serves  a  great  need  and  is 
becoming  more  important  each  year.  This  growth  in  all  prob- 
ability is  destined  to  continue,  because  there  is  a  great  demand 
for  insurance  of  this  kind.  It  is  possible  that  the  plan  may 
eventually  be  extended  to  insure  whole  communities  regardless 
of  employment.  In  fact,  this  is  quite  practicable  in  every 
respect  except  the  collection  of  the  premium. 

Sub-standard  insurance  —  its  purpose. — A  sub-standard 
risk  is  one  which  a  company  will  not  accept  by  its  regular 
method  of  selection  and  at  its  regular  rates.  This  definition, 
of  course,  must  be  viewed  from  the  individual  standpoint  of 
each  company,  because  rates  and  method  of  selection  differ 
considerably  among  the  several  companies  and  a  risk  that  may 
be  classed  as  sub-standard  by  one  company  may  be  normal  for 
another.  There  is  a  point,  however,  below  which  all  com- 
panies will  consider  a  risk  as  undesirable  according  to  their 
regular  standards.  The  failures  of  risks  to  meet  the  standard 
are  due  to  many  causes,  of  which  the  following  are  the  most 
common :  occupation,  overweight,  underweight,  family  history, 
heart  murmur,  rapid  pulse  and  sugar  and  albumen  excess  in  the 
kidneys.  Nevertheless  these  risks  are  possibly  in  greater  need 
of  insurance  than  the  more  fortunate  who  can  pass  the  regular 
medical  examination.  The  development  of  insurance  on  such 
cases  is  recent  but,  as  experience  in  connection  with  these 
impaired  lives  grows,  the  various  companies  are  extending 
their  risks.  Undoubtedly  a  great  service  is  rendered  by  those 
companies  which  adjust  their  premiums  to  take  care  of  this 
class  of  individuals  and  it  is  stated  on  good  authority  that,  of 
the  10  per  cent  of  applicants  who  fail  to  pass  the  regular 
examination,  a  majority  can  secure  sub-standard  insurance. 

Method  of  rating  sub-standard  lives. — There  are  several 


SPECIAL  FORMS  OF  LIFE  INSURANCE      137 

methods  of  rating  sub-standard  risks  but  those  principally 
used  are :  ( 1 )  to  defer  the  dividend ;  ( 2 )  to  place  a  lien  against 
the  policy;  (3)  to  charge  a  flat  extra  premium;  (4)  to  grant 
only  a  restricted  type  of  policy,  or  (5)  to  charge  a  premium  as 
of  some  advanced  age.    A  brief  description  of  each  follows : 

1.  Deferring  the  dividend. — This  was  one  of  the  first 
methods  employed,  and  no  dividend  was  paid  until  the  policy 
had  been  in  force  for  15  or  20  years.  It  is  not  a  very  satis- 
factory method  and»has  fallen  into  disuse. 

2.  Placing  a  lien  against  the  policy. — Under  this  system  a 
lien  is  placed  against  the  policy  and  deducted  if  death  occurs 
within  a  certain  period.  Usually  it  is  on  a  decreasing  plan,  so 
that  if  the  Insured  lives  beyond  a  certain  number  of  payments, 
no  deduction  is  made  from  the  face  of  the  policy.  This  plan 
has  never  been  very  popular. 

3.  Charging  an  extra  premium. — This  is  used  extensively  in 
the  case  of  occupational  hazards,  such  as  a  flat-rate  increase  in 
the  case  of  locomotive  engineers. 

4.  Restricting  the  type  of  policy. — This  plan  causes  less 
objection  from  the  Insured  and  where  the  defects  of  the  Indi- 
vidual are  slight  it  Is  possibly  the  best  method  of  rating.  Thus. 
a  limited-payment  policy  or  an  endowment  may  safely  be 
granted,  while  ordinary-life  or  term  Insurance  could  not. 

5.  Advancing  the  age. — For  most  purposes  this  is  the 
method  now  used  and  seems  to  meet  the  needs  better  than  any 
other  single  method.  The  manner  of  rating  is  to  charge  the 
premium  as  of  some  advanced  age,  depending  on  the  seriousness 
of  the  cause  for  being  classed  as  sub-standard.  In  extreme 
cases  It  frequently  happens  that  the  Individual  is  not  only  rated 
up  but  also  restricted  to  certain  types  of  policies. 

The  greatest  advantage  of  such  a  system  of  insurance  Is 
that  those  people  who  need  it  most  are  able  to  secure  it.  The 
only  disadvantage  is  the  lack,  of  experience  on  which  to  base 
the  rate,  which  results  in  some  inequality  of  charges. 


Chapter  XI 

ACCIDENT  AND  HEALTH  INSURANCE 

Losses  due  to  accident  and  disease. — Life  Insurance  pro- 
tects a  man's  dependents  from  poverty  and  suffering  after  his 
death  but  the  man  who  is  incapacitated  and  unable  to  earn 
a  livelihood  also  has  need  of  insurance,  for  the  financial  hard- 
ships in  such  a  case  may  be  worse  than  those  resulting  from 
death.  Compensation  insurance  covers  industrial  accidents 
but  there  are  many  accidents  occurring  without  relation  to 
occupation,  and  sickness  causes  about  seven  times  the  loss  of 
time  attributable  to  accidents. 

It  is  estimated  that  over  250,000,000  working  days  are  lost 
each  year  in  the  United  States  due  to  sickness  alone,  and  that 
there  occur  annually  about  5,000,000  accidents,  of  which  less 
than  one-half  are  incurred  in  the  course  of  employment.  In 
other  words  the  majority  of  the  losses  due  to  accident  or  dis- 
ease are  not  covered  by  workmen's  compensation,  and  while  an 
examination  of  the  causes  leads  to  the  belief  that  accidents  can 
be  reduced,  they  cannot  be  entirely  eliminated. 

Some  of  the  accidents  and  diseases  arise  from  conditions 
of  employment,  and  are  therefore  partially  covered  by  the  com- 
pensation acts  of  the  various  States,  as  explained  in  Chapter 
XII.  These,  however,  provide  only  limited  indemnity  for  acci- 
dents and  very  few  provide  at  all  for  so-called  "industrial  dis- 
eases." Such  laws  also  cover  only  accidents  incurred  in  the 
course  of  employment  and  the  remaining  one-half  of  the  acci- 
dents and  diseases  are  unaffected  thereby.  So  important  has 
this  economic  factor  been  considered,  that  compulsory  govern- 
ment insurance  has  been  proposed  as  a  remedy,  designed  to 
make  the  individual  provide  against  the  evil  results  of  acci- 
dents and  ill-health.  It  has  been  argued  that  sickness  and 
injury  give  rise  to  so  much  suffering  and  poverty  in  the  incapaci- 
tated person  and  his  dependents  that  they  constitute  a  com- 
munity problem  to  be  solved  by  community  effort.     Bills  have 

13S 


A  C  CI  DEN  T  AND  HEAL  TH  INS  U  RANGE      1 3  9 

therefore  been  Introduced  in  State  legislatures  to  provide  sys- 
tems for  such  insurance.  In  the  past,  however,  the  forms  of 
private  insurance  discussed  in  this  chapter  have  been  the  indi- 
vidual's principal  protection  against  non-industrial  injury  and 
sickness  and  probably  will  continue  to  be  for  some  time  in  the 
future. 

The  accident  and  health  policy  Is  a  natural  complement  to 
the  life  Insurance  policy;  the  latter  protects  against  a  perma- 
nent loss  of  earning  capacity,  the  former  against  a  permanent 
or  temporary  loss  of  the  same  through  accident  or  disease. 
Two  partially  overlapping  forms  of  protection  against  these 
risks  are  therefore  offered.  The  "disability  clause"  which 
appears  on  many  life  Insurance  policies  protects  only  against 
pemanent  disability  and  sometimes  only  against  permanent  and 
total  disability.  Accident  and  health  Insurance  policies,  on  the 
other  hand,  usually  also  protect  against  those  temporary  dis- 
abilities which  cause  the  greater  part  of  the  economic  loss  and 
suffering. 

Disability  clauses  in  life  insurance  policies/ — In  recent 
years  various  life  Insurance  companies,  by  adding  a  disability 
clause  to  their  policies,  have  sought  to  make  some  provision  for 
such  contingencies.  In  most  Instances  these  clauses  provide 
only  for  total  and  permanent  disability  or,  at  best,  partial  and 
permanent  disability,  the  definitions  of  disability  being  usually 
narrow  and  restricted.  Since  over  97  per  cent  of  all  disabilities 
are  of  a  temporary  nature  the  actual  value  of  these  clauses  Is 
open  to  debate. 

Their  limited  value  Is  perhaps  due  to  the  unwillingness  of 
many  of  the  life  companies  to  enter  a  field  concerning  which 
comparatively  little  Is  known.  They  Inaugurated  the  disability 
clause  mainly  for  competitive  purposes  and  the  extension  which 
has  taken  place  was  made  necessary  by  the  same  cause. 

Originally  they  promised,  for  a  small  additional  premium, 
to  waive  all  future  payments  of  the  premium  In  case  of  total 
and  permanent  disability.  This  could  not  possibly  cost  the  In- 
surance company  a  great  sum,  because  the  average  length  of 
life  of  a  person  so  Incapacitated  is  less  than  two  years.  Later, 
however,  the  clause  was  broadened  so  that  the  policy  would 
mature  under  such  conditions  and  the  Insured  would  receive 
the  proceeds  in  accordance  with  some  specified  plan.  Some 
clauses  fix  this  plan  definitely,  while  others  give  the  Insured  an 

*  See  Appendices  III  and  IV. 


140    INSURANCE  PRINCIPLES  AND  PRACTICES 

option  along  lines  similar  to  the  different  installment  policy 
options  explained  in  a  previous  chapter. 

A  further  provision  of  this  type  is  one  which  stipulates  that 
not  only  will  the  company  pay  a  disability  income,  but  that 
when  death  occurs  the  full  face  of  the  policy  will  also  be  paid.^ 
Another  clause  promises  to  pay  double  indemnity  if  death 
occurs  on  account  of  one  of  a  specified  list  of  accidents.  Just 
why  a  man's  life  should  be  worth  more  if  he  dies  in  a  certain 
manner  is  difficult  to  understand  but  at  least  it  can  be  used  as 
a  selling  argument. 

The  tendency  of  these  clauses  is  toward  expansion,  for  which 
there  is  much  room,  since  the  definition  of  disability  is  still  far 
from  liberal,  the  options  are  few,  women  are  excluded,  and  the 
age  restriction  is  usually  sixty  or  sixty-five  years.  As  experience 
is  collected  a  further  development  may  be  expected. 

Coverage  by  a  separate  contract. — At  the  present  time 
greater  and  more  liberal  coverage  is  possible  through  a  policy 
covering  accident  only,  or  illness  only.  Better  yet  is  the  com- 
bination of  the  two,  known  as  an  'Accident  and  Health 
Policy,"  ^  which  pays  no  indemnity  for  death  from  natural 
causes.  A  modern  contract  of  this  class,  indemnifying  for  loss 
of  time  through  accident  or  sickness,  is  a  valuable  supplement 
to  a  life  insurance  policy,  and  equally  important,  for  nearly 
one-half  of  all  the  poverty  in  the  United  States  is  due  to  loss 
of  income  arising  from  accident  or  ill  health.  When  such  an 
unfortunate  event  occurs  and  a  person's  earning  power  is 
totally  or  partially  destroyed  it  also  usually  follows  that  ex- 
penses are  greater,  largely  because  of  necessary  medical  atten- 
tion. There  can  be  no  question  that  indemnity  for  such  losses 
should  be  made  possible.  Judging  from  the  fact  that  the 
premium  income  on  this  class  of  insurance  has  doubled  in  the 
past  five  years  it  is  reasonable  to  conclude  that  the  possibilities 
may  be  more  fully  realized  in  the  near  future. 

This  recent  rapid  growth  is  not  the  mushroom  growth  of  a 
new  type  of  insurance.  The  business  has  lagged  because  it  has 
never  before  been  properly  brought  to  the  attention  of  the 
public,  the  policies  have  not  been  liberal  but  have  been  limited 
in  their  scope,  and  the  attitude  of  some  companies  writing  this 
class  of  business  (particularly  accident)  has  been  to  avoid  as 
many  payments  as  possible. 

'See  clause  in  Appendix  III. 

*See  Appendices  XVI,  XVII,  and  XVIII. 


ACCIDENT  AND  HEALTH  INSURANCE     141 

All  this  is  now  changed,  the  tendency  being  to  push  this  line 
of  insii'-ance,  and  the  companies  are  now  competing  to  see 
which  can  provide  the  most  complete  coverage  and  give  the 
best  service  for  the  least  cost.  The  business,  however,  is  in  a 
transitional  period  and  the  policies  have  not  yet  reached  the 
stage  of  perfection.  This  has  resulted  in  a  market  flooded  with 
a  lot  of  policies  among  which  there  is  very  little  uniformity. 
Many  States  have  recently  attempted  to  stabilize  conditions  by 
requiring  "standard"  provisions,  as  in  life  insurance.  This 
has  at  least  forced  out  some  of  the  poorer  accident  policies, 
which  apparently  covered  much  but  in  reality  covered  practi- 
cally nothing.  It  does  not  solve  the  problem,  however,  because 
the  "additional"  provisions  are  frequently  important  and  the 
variance  among  them  is  very  great.  In  order  to  better  under- 
stand the  risk  assumed  and  to  recognize  the  good  and  poor 
policies,  we  will  now  turn  to  a  classification  and  description  of 
these  contracts. 

Types  of  Policies. — 1.  Ticket  Accident  Policy. — This  is  a 
policy  covering  death  or  injury  by  accidental  means  and  is 
issued  for  periods  of  a  day,  week,  30  days,  and  90  days.  It  can 
be  obtained  at  the  ticket  office  of  nearly  any  railroad  station  and 
is  used  principally  by  travellers.  When  issued  the  date  and 
hour  are  stamped  on  it  and  it  runs  for  the  highest  number  of 
days  fixed  by  attached  coupons,  ending  at  noon  if  issued  any 
time  up  to  noon,  or  at  midnight  if  issued  after  noon.  The  pay- 
ments promised  for  ordinary  accidents  are  usually  $2,500  if 
death  occurs  within  90  days,  $1,250  for  loss  of  both  hands  or 
both  feet,  $12.50  a  week  for  52  weeks  for  total  disability,  and 
$6.25  a  week  for  26  weeks  for  partial  disability.  If  the  loss 
occurs  because  of  an  accident  while  being  transported  by  a  com- 
mon carrier  the  payments  are  doubled.  The  premium  for 
such  a  policy  is  25  cents  per  day,  $1.50  a  week,  $4.50  for  30 
days,  and  $10  for  90  days. 

The  value  of  such  protection  is  difficult  to  estimate  because 
It  does  not  cover  disappearances,  injuries  where  there  is  no 
visible  wound  or  contusion  on  the  body  of  the  insured, 
medical  or  surgical  treatment,  hernia,  poisoning,  sunstroke  or 
freezing,  injuries  resulting  from  firearms,  fireworks,  racing  or 
games,  suicide,  accidents  while  entering  or  leaving  any  moving 
conveyance  and  numerous  other  contingencies.  In  other 
words  the  causes  of  accidents  that  are  most  apt  to  occur  are 


142    INSURANCE  PRINCIPLES  AND  PRACTICES 

eliminated,  although  op  the  daily  basis  the  insured  is  paying 
$91  a  year  for  the  insurance. 

2.  Limited  Policies.^ — These  cover  accident  or  sickness  due 
to  specific  causes  named  in  the  contract.  While  the  ticket  acci- 
dent policy  enumerates  those  causes  which  are  eliminated,  the 
limited  policy  mentions  only  those  which  are  covered.  This 
type  of  policy  has  been  one  of  the  most  misleading  that  has 
ever  been  Issued  because,  In  many  Instances,  the  accidents  or 
diseases  specified  are  among  the  remote  possibilities.  Not  only 
are  the  events  covered  specified,  but  frequently  even  the  manner 
in  which  they  must  happen.^'  The  result  is  a  policy  with  little  or 
no  coverage,  and  when  the  Insured  finds  himself  disabled  he  Is 
likely  to  find  also  that  the  policy  which  he  thought  was  a  good 
one  is  a  mere  scrap  of  paper.  So  much  dissatisfaction  has  re- 
sulted from  this  that  many  of  these  policies  have  been  sup- 
planted by  general  or  unlimited  policies.  In  fact,  since  the 
organization  of  the  Casualty  Actuarial  and  Statistical  Society 
of  America,  in  1914,  there  has  been  much  general  improve- 
ment in  all  accident  and  health  policies. 

3.  General  or  Unlimited  Policies.^ — The  scope  of  these 
policies  is  more  or  less  general  and  they  are  not  limited  merely 
to  a  few  causes  as  Is  the  preceding  type.  Of  course  the  cost 
is  greater,  but  the  protection  afforded  is  much  more  adequate. 
With  the  exception  of  the  standard  provisions,  however,  these 
policies  also  vary  considerably.  Most  of  them  provide  for 
indemnity  in  case  of  accidental  death,  the  amount  thus  paid 
being  known  as  the  principal  sum.  This  Is  usually  the  basis 
of  calculation  for  double,  triple,  or  quadruple  Indemnity,  and 
also  for  the  amount  payable  for  total  disability.  For  example, 
one  policy  says  that  for  death  from  ordinary  accident  the 
company  will  pay  $10,000;  for  loss  of  both  hands,  $10,000; 
for  loss  of  both  feet,  $10,000;  loss  of  both  eyes,  $10,000;  one 
hand  and  one  foot,  $10,000;  one  hand  and  sight  of  one  eye, 
$10,000;  one  foot  and  sight  of  one  eye,  $10,000;  either  hand, 
$5,000;  either  foot,  $5,000;  and  sight  of  one  eye,  $2,500.  If 
the  accident  occurs  on  a  common  carrier  or  passenger  elevator, 
each  of  these  sums  Is  doubled,  tripled  or  quadrupled.  In  this 
illustration,  $10,000  is  considered  as  the  principal  sum.    This 

*  See  Appendices  XVI  and  XVII. 
•See  Appendices  XVI  and  XVII. 
•See  Appendix  XVIII. 


ACCIDENT  AND  HEALTH  INSURANCE       143 

same  policy  provides  $50  weekly  indemnity  for  total  disability, 
payable  as  long  as  the  insured  lives  in  such  disabled  condition, 
and  $20  weekly  for  partial  disability  for  a  maximum  of  twerrfy- 
six  weeks. 

In  other  policies  the  total  disability  benefits  are  limited  to 
from  fifty-two  weeks  to  four  years,  and  still  others  grant  par- 
tial benefits  for  as  long  as  such  disability  continues.  Frequently 
hospital  and  surgical  fees  are  paid  as  per  a  policy  schedule. 
Elective  settlements  may  be  provided,  such  as  installment  pay- 
ments, interest-bearing  bonds,  reward  for  identification, 
■benefits  increasing  with  each  renewal,  and  indemnity  for  acci- 
dental death  or  disability  of  the  beneficiary  or  other  members 
of  the  insured's  family. 

Combination  accident  and  health  policies  cover  disease  as 
well  as  accident.  To  receive  indemnity,  the  insured  must  be 
unable  to  perform  his  regular  duties  and  be  attended  by  a 
physician,  a  distinction  usually  being  made  between  benefits 
payable  when  confined  to  the  house  and  non-confinement  bene- 
fits. In  some  cases,  benefits  do  not  begin  until  a  certain  period 
of  disability  has  elapsed,  varying  from  two  days  to  three 
months,  although  frequently  when  the  disability  exceeds  the 
specified  period,  the  indemnity  is  calculated  from  the  date  when 
disability  commenced. 

The  disadvantages  of  the  policies  thus  far  discussed  are 
as  follows:  (a)  The  company  customarily  retains  the  right 
of  cancellation,  even  during  the  policy  term,  so  that  the  insured 
may  legally  be  deprived  of  his  insurance  at  any  time,"  although 
without  prejudice  to  any  claim  originating  prior  thereto, 
(b)  In  addition  to  the  above,  the  company  may  refuse  to 
renew  at  the  expiration  of  the  term  (usually  one  year).  Thus 
the  insured  may  lose  his  insurance  when  he  needs  it  most, 
because  as  a  result  of  a  risk  becoming  sub-standard,  the  com- 
pany may  refuse  to  renew. 

On  the  other  hand,  while  the  privilege  of  cancellation  and 
non-renewal  enables  an  insurance  company  to  relieve  itself  of 
risks  which  become  undesirable  from  a  physical  standpoint,  it 
also  permits  it  to  protect  itself  against  the  moral  risk  of  per- 
sons who  endeavor  to  obtain  payments  on  fraudulent  claims. 
It  also  enables  the  insertion  of  a  shorter  waiting  period,  which 
to  certain  classes  of  persons  is  a  distinct  advantage.  Under  a 
non-cancellable  form,  a  company  must  take  the  strictest  pre- 

'See  p.  397. 


144    INSURANCE  PRINCIPLES  AND  PRACTICES 

cautions  at  the  time  of  writing  the  policy,  i.e.,  must  endeavor 
to  foresee  future  conditions  and  charge  a  premium  accordingly. 
A  large  number  of  non-cancellable  policies  appeared  during 
the  past  few  years  and  some  companies  which  initiated  this 
type  have  abandcfned  it. 

4.  Non-cancellable  Contracts^'' — Under  the  non-cancellable 
form  of  policy,  the  company  has  no  cancellation  privilege  and 
the  insured  cannot  be  deprived  of  insurance  by  refusal  to 
renew.  One  type  of  such  policy  approximates  the  policies 
previously  referred  to,  with  payments  of  specific  indemnities 
for  loss  of  members,  and  other  special  features.  The  other 
type  confines  its  protection  to  indemnity  for  loss  of  time,  and 
this  latter  was  recommended  by  the  Actuarial  and  Under- 
writing Committee  of  the  Bureau  of  Personal  Accident  and 
Health  Underwriters  in  1921.  Another  liberal  addition  found 
in  at  least  one  non-cancellable  contract  is  an  incontestable 
clause,  making  the  policy  after  one  year  incontestable  as  to 
the  time  of  the  happening  of  bodily  injury  or  sickness  causing 
disability  commencing  after  such  year  and  while  it  is  In  force. 

5.  Industrial  or  Corporate  Accident  and  Health. — A  de- 
sire for  more  extensive  or  cheaper  coverage  has  led  to  the 
organization  of  many  mutual  aid  associations,  the  more 
Important  being  fraternal,  trade-union,  and  corporation  benefit 
funds.  Many  of  the  lodge-principle  fraternals  have  provided 
their  members  with  some  form  of  accident  and  sickness  bene- 
fits. Frequently  these  funds  have  been  raised  from  dues  and 
assessments  and  without  an  adequate  scientific  basis,  resulting 
In  financial  difl'iculties  and  uncertainty  as  to  ultimate  receipt 
of  benefits.  They  have  nevertheless  done  very  beneficial  work 
In  attempting  to  provide  a  broad  coverage  against  these  con- 
tingencies, and  some  have  been  wisely  managed. 

Various  trade  unions  have  duplicated  the  efforts  of  the 
fraternals  to  provide  for  accident  and  sickness.  Their  benefits 
are  also  frequently  obtained  from  dues  and  assessments,  and 
the  ability  to  pay  depends  upon  the  size  and  importance  of 
the  union,  as  well  as  upon  the  loyalty  of  Its  members. 

Large  corporations,  particularly  railroads  and  steel  com- 
panies, have  formed  voluntary  relief  associations  and,  know- 
ing from  experience  the  amount  needed  to  cover  such  contin- 
gencies, they  deduct  a  certain  amount  from  employees'  pay 
for     this     purpose.        Many     corporations     guarantee     the 

'a  See   Appendix   XVIII. 


ACCIDENT  AND  HEALTH  INSURANCE     145 

solvency  of  these  organizations,  and  some  contribute  50  per 
cent  or  some  other  proportion  of  the  cost. 

6.  Workmen's  Collective  Insurance. — This  is  nothing 
more  than  a  group  accident  policy,  the  premium  being  as- 
sumed by  the  employer,  as  in  the  case  of  the  group  life  insur- 
ance contract  explained  in  a  previous  chapter.  In  so  far  as 
the  accident  feature  is  concerned,  workmen's  compensation  in- 
surance has  largely  displaced  it,  but  a  policy  covering  sickness 
and  non-occupational  accidents  is  now  being  written  by  sev- 
eral companies. 

Analysis  of  principal  parts  of  accident  and  health  policies. 
— As  previously  mentioned,  there  is  no  uniformity  in  the  pol- 
icies on  the  market;  however,  when  a  person  obtains  a  policy 
he  expects  to  get  the  best.  This  is  difficult  to  determine  unless 
one  knows  how  to  analyze  a  policy.  Therefore,  in  order  to  be 
better  prepared  to  make  a  selection,  the  following  explanation 
of  the  essential  features  of  the  combination  accident  and 
health  contract  is  given. 

1.  The  insuring  clause.^ — This  indicates  what  the  policy 
covers.  A  typical  clause  reads  as  follows:  "The Insur- 
ance Company  hereby  Insures  the  person  named  as  applicant 
in  the  copy  of  application  for  this  policy,  endorsed  hereon  or 
attached  hereto,  subject  to  the  provisions,  conditions,  and 
limitations  herein  contained,  against  loss  resulting  directly  and 
independently  of  all  other  causes,  from  bodily  injuries  effected 
during  the  term  of  this  policy  solely  through  external,  violent 
and  accidental  means,  and  against  disability  from  disease  con- 
tracted during  the  term  of  this  policy."  The  insuring  clause 
of  another  policy  which  covers  accidental  loss  of  life  in  addi- 
tion to  disability  reads  as  follows :  "The Insurance  Com- 
pany hereby  insures (herein  called  the  Insured  and  de- 
scribed in  the  Application),  subject  to  all  provisions  and 
limitations  herein  contained:  Against  loss  of  life  resulting  di- 
rectly and  independen\tly  of  all  other  causes  from  bodily 
injury  effected  during  the  term  of  this  policy  solely  through 
accidental  means;  and  against  disability  resulting  from  bodily 
injury  effected  during  the  term  of  this  policy  through  accidental 
means;  and  against  disability  resulting  from  sickness  co\v 
tracted  and  beginning  after  the  date  hereof;  such  disability,  in 
both  cases,  to  be  such  as  will  result  in  continuous  total  los^ 
of  business  time." 

*  See  Appendices  XVI,  XVII  and  XVIII. 


146    INSURANCE  PRINCIPLES  AND  PRACTICES 

Note  the  difference  between  the  clauses  covering  disability 
resulting  from  an  accident.  ( 1 )  The  former  says  the  accident 
must  be  "effected  directly  and  independently  of  all  other 
causes,"  while  the  latter  does  not.  The  presence  of  the  former 
stipulation  means  that  no  other  agency  can  intervene,  such  as 
a  pre-existing  disease  or  infirmity.  This  phrase,  it  will  be 
noted,  is  contained  in  the  latter  policy  only  in  the  clause  cover- 
ing loss  of  life.  (2)  One  says  the  accident  must  occur  "solely 
through  external,  violent,  and  accidental  means,"  while  the 
other  merely  says  "solely  through  accidental  means."  Ob- 
viously the  latter  is  a  broader  provision  and  is  not  subject  to 
arguments  as  to  whether  the  accident  was  external  or  violent, 
although  the  force  of  these  two  words  is  questionable. 

The  important  part  of  the  phrase  in  either  policy  is  the  term 
"accidental  means."  This  has  been  subject  to  interpretation 
by  the  United  States  Supreme  Court  and  it  has  been  decided 
that  the  event  immediately  preceding  the  happening  of  the 
"accident"  must  have  been  unexpected.  Thus,  if  the  insured 
is  carrying  a  heavy  burden  and  thereby  breaks  an  arm,  it 
cannot  be  called  "accidental  means."  If,  however,  he  is  carry- 
ing this  same  burden  and  receives  some  unexpected  blow,  which 
breaks  his  arm,  the  injury  is  included  in  the  term  "accidental 
means."  This  objection  has  been  overcome  in  some  policies 
by  changing  the  clause  to  "accidental  injury." 

The  phraseology  relating  to  disability  resulting  from  dis- 
ease differs  very  little  in  the  various  policies,  usually  stating 
that  sickness  must  be  contracted  after  the  policy  is  written. 

Practically  all  Insuring  clauses  mention  limitations  and  a 
thorough  inspection  to  discover  these  limitations  must  be  made, 
because  they  are  apt  to  be  found  anywhere  except  in  the  stan- 
dard provisions. 

2.  Total  disability  clause.^ — The  interpretation  of  disabil- 
ity is  often  the  deciding  factor  as  to  whether  a  claim  has  arisen 
or  not.  Definitions  of  total  disability  vary  from  "such  in- 
juries or  disease  as  shall  immediately  and  independent  of  all 
other  causes  wholly  and  continuously  disable  the  insured  from 
following  any  gainful  occupation,"  to  "such  injuries  or  disease 
as  shall  prevent  the  insured  from  performing  the  duties  of  his 
occupation,"  and  are  incontestable  as  to  the  time  of  occurrence. 
The  United  States  War  Risk  Insurance  Bureau,  in  connection 

•  See  Appendices  XVI,  XVII  and  XVIII. 


ACCIDENT  AND  HEALTH  INSURANCE     147 

with  its  life  policies,  has  defined  total  disability  as  "impair- 
ment of  mind  or  body  which  makes  it  impossible  for  the  in- 
sured to  engage  in  a  substantially  gainful  occupation."  This 
is  apparently  one  of  the  most  liberal  definitions  yet  given,  al- 
though "loss  of  business  time,"  as  mentioned  previously  in 
one  of  the  insuring  clauses,  Is  also  considered  favorable  to 
the  insured. 

Indemnity  Is  often  limited  to  fifty-two  weeks  but  In  some 
policies  it  continues  until  the  insured  dies.  Loss  of  sight  and 
dismemberment  of  two  or  more  extremities  arc  sometimes 
deemed  total  and  permanent  disability  without  further  Inves- 
tigation. 

A  distinction  is  frequently  made  between  a  disability  which 
requires  house  confinement,  as  compared  with  one  that  does 
not,  and  this  makes  a  big  difference  In  many  diseases,  particu- 
larly tuberculosis.  Practically  all  policies  require  that  the 
disability  be  one  which  requires  regular  attendance  by  a  physi- 
cian. This  is  a  practical  necessity  in  order  to  prevent  unjust 
claims. 

3.  Partial  disability. ^'^ — In  some  policies  partial  disability 
is  covered,  and  the  amount  payable  is  a  fraction  of  that  for 
total  disability.  With  the  exception  of  loss  of  sight  or  dis- 
memberment, however,  partial  disability  benefits  seldom  run 
beyond  twenty-six  weeks.  It  should  be  added  that  disability 
under  all  policies,  except  those  Issued  by  the  United  States 
Government,  must  begin  within  an  age  limit,  usually  from 
eighteen  to  sixty-five. 

4.  Death. — Those  policies  which  include  payment  for  ac- 
cidental death  usually  specify  that  the  death  must  occur  within 
a  limited  time  after  the  accldent,^^  such  as  ninety  or  one  hun- 
dred and  twenty  days. 

5.  Optional  benefits. — In  place  of  the  lump  sum  for  acci- 
dental death  It  is  frequently  provided  that  some  other  method 
may  be  used,  such  as  a  reversionary  annuity,  a  gold  bond  with 
interest,  or  an  installment  plan. 

6.  Standard  provisions. — These  are  required  by  State 
statutes  and  are  primarily  for  the  protection  of  the  Insured 
against  false  policies  and  fraud.  Some  attempts  have  been 
made  to  have  the  several  States  make  these  provisions  uniform, 
as  in  life  and  fire  insurance. 

'"See  Appendix  XVIII. 
"  See  Appendix  XVIII. 


148    INSURANCE  PRINCIPLES  AND  PRACTICES 

7.  Additional  provisions. — Under  this  heading,  we  find 
many  of  the  "limitations  herein  contained"  mentioned  in  the 
insuring  clause,  and  the  following  is  a  list  of  typical  exclusions  : 

(a)  "Any  disability  for  which  the  Insured  is  not  necessarily 
and  regularly  attended  by  a  legally  qualified  physician  other 
than  the  Insured;"  (b)  "suicide,  sane  or  insane,  or  any  attempt 
thereat,  sane  or  insane;"  (c)  "women;"  (d)  "loss  of  life  or 
disability  resulting  wholly  or  partly,  directly  or  indirectly  from 

( 1 )  bodily  injury  sustained  or  sickness  contracted  while  the 
Insured  is  engaged  in  military  or  naval  service  in  time  of  war, 

(2)  bodily  injury  sustained  or  sickness  contracted  from  riding 
or  being  in  or  upon  any  aerial  device  or  conveyance,  ( 3 )  bodily 
injury  sustained  or  sickness  contracted  while  the  Insured  is 
outside  Canada  or  Europe  or  the  United  States  (not  includ- 
ing Alaska,  Panama  Canal  Zone  or  the  insular  possessions  of 
the  United  States)  ;"  (e)  "persons  under  age  18  or  over 
age  60." 

8.  Miscellaneous  Provisions. — So  called  "frills"  are  some- 
times found  providing  for  double  indemnity  while  in  the  hos- 
pital; double,  triple,  and  quadruple  indemnity  if  an  accident 
occurs  in  a  specified  place  or  manner;  fixed  amounts  for  spe- 
cific losses;  surgical  benefits  and  doctors'  fees;  a  reward  for 
identification;  or  accumulations  of  the  benefits  as  the  policy 
becomes  older  (e.g.  10  per  cent  increase  in  benefits  each  year 
for  five  years.) 

Important  things  to  examine  in  accident  and  health 
policies. — From  the  preceding  analysis  it  is  obvious  that  the 
insured  has  many  things  to  guard  against  when  securing  acci- 
dent and  health  insurance.  For  convenience,  the  most  com- 
mon limitations  are  listed  below: 

1.  Definition  of  total  disability. 

2.  Exclusion  of  certain  risks, 

3.  Age  limit. 

4.  Elimination  of  benefits  for  a  specified  period. 

5.  Maximum  period  for  which  Indemnity  will  be  paid. 

6.  The  time  within  which  death  must  occur  after  an  acci- 
dent. 

7.  Right  of  the  company  to  cancel. 

8.  Inability  of  the  Insured  to  renew. 


ACCIDENT  AND  HEALTH  INSURANCE     149 

Accident  insurance  rates.^" — ^Wlth  the  exception  of  policies 
covering  loss  of  time  due  to  sickness  and  disease,  usually  no 
medical  examinations  are  required.  Therefore,  the  rates 
charged  are  based  on  occupation  and  are  classified  in  nine 
groups,  according  to  hazard,  as  follows : 

Ratio  of  Indemnity  in  more 
Classification  I'lcrease  in  /,azarcious  occupations  to 

^^"  Indemnity  in  preferred  class 

Per  Cent  Per  Cent 

Preferred 100  100 

Special  Preferred 120  83 

Extra  Preferred 125  80 

Ordinary 167  60 

Medium 250  40 

Hazardous 300  33 

Extra  Hazardous 400  25 

Perilous , 500  20 

Extra  Perilous 2,000  5 

The  rate  manual  classifies  all  occupations  under  one  of  these 
nine  groups  and  the  premium  is  a  percentage  of  the  rate  for 
the  preferred  class.  Thus,  if  $20  is  the  rate  for  preferred 
risks,  $60  is  the  rate  for  hazardous  risks.  One  of  the  stan- 
dard provisions  is  that  when  the  insured  changes  his  occupa- 
tion to  one  more  hazardous  the  premium  shall  be  applied  to 
purchase  the  benefits  of  the  more  hazardous  occupation.  For 
example,  if  a  preferred  risk  holds  a  policy  promising  $50  per 
week  indemnity  and  changes  to  an  occupation  classified  as 
medium,  the  Indemnity  will  be  changed  to  $20  per  week. 

It  should  be  mentioned  in  this  connection  that  many  accident 
and  health  policies  arc  not  written  for  the  more  dangerous 
classifications,  some  companies  accepting  only  those  risks 
which  will  fall  Into  one  of  the  first  three  classifications. 

So  far,  these  rates  have  been  for  the  most  part  based  on 
the  judgment  of  the  Individual  companies.  The  most  con- 
clusive proof  that  this  Is  the  case  Is  the  fact  that  the  same  prem- 
iums are  charged  regardless  of  age.  However,  the  business 
is  now  going  through  the  process  of  reform  and  the  com- 
panies are  combining  their  experience  for  this  purpose,  the 
most  Important  work  being  the  ascertainment  of: 

1.  Rate  of  disability  from  accidental  causes. 

2.  Rate  of  disability  from  disease. 

"  See  Appendix  XIX. 


150    INSURANCE  PRINCIPLES  AND  PRACTICES 

3.  Number  of  days'  sickness  from  disease  to  each  year  of 
exposure. 

4.  Rate  of  loss  of  sight. 

5.  Rate  of  loss  of  hearing. 

6.  Rate  of  loss  of  limb. 

The   results  obtained  must  then  be   applied  to   a   specific 
policy  with  the  following  underlying  factors  in  mind: 

1.  Comparative  hazard  of  the  occupation. 

2.  Effect  of  injury  upon  the  performance  of  the  duties  per- 
taining to  the  occupation. 

3.  Influence  of  occupation  upon  physical  habits  and  condition. 

4.  Moral  hazard  Incident  to  the  occupation. 

5.  Moral  hazard  pertaining  to  malingering,  over-insurance, 
and  self-inflicted  injuries. 

6.  Physical  condition  and  age. 

Accident  insurance  reserves. — The  reserves  for  this  type 
of  insurance  are  similar  to  those  of  workmen's  compensation 
Insurance.  An  unearned  premium  reserve  of  50  per  cent  of  the 
gross  premium  must- be  maintained  on  contracts  over  a  period 
of  twelve  months.  Also,  a  reserve  for  outstanding  claims, 
particularly  those  that  may  run  for  a  long  time.  The  princi- 
ples of  such  a  reserve  are  more  fully  described  in  the  chapter 
on  Workmen's  Compensation  Insurance.  The  non-cancellable 
contract  needs  an  additional  reserve  to  take  care  of  the  claims 
that  will  not  arise  until  the  distant  future. 

Compulsory  health  insurance. — In  recent  years  much  Has 
been  said  concerning  the  benefits  and  evils  of  compulsory 
health  Insurance.  We  saw  in  the  first  part  of  the  chapter 
that  provision  should  be  made  for  distributing  the  loss  due 
to  sickness,  but  so  far  we  have  discussed  only  private  methods. 

Compulsory  health  insurance  presupposes  that  every  one  will 
be  insured  and  that  the  business  will  be  administered  through 
a  governmental  agency.  Such  a  plan  has  been  tried  with 
varying  success  In  European  countries  and  this  has  led  to  the 
agitation  for  a  similar  scheme  In  the  United  States.  As  a  result 
the  subject  was  investigated  by  the  United  States  Public  Health 
Service,  which  has  recommended  a  system  which  should : 

1.  Provide  cash  benefits  and  medical  service  for  all  wage- 
earners  In  times  of  sickness  at  much  less  cost  than  is  now  pos- 
sible.    Adequate  medical  relief  would  thus  be  placed  within 


ACCIDENT  AND  HEALTH  INSURANCE     151 

the  reach  of  even  the  lowest-paid  workers,  who  are  most  sub- 
ject to  ill-health. 

2.  Distribute  the  cost  among  employers,  employees  and  the 
public  as  constituting  the  groups  responsible  for  conditions 
causing  disease,  and  afford  these  groups  a  definite  financial 
incentive  for  removing  these  conditions.  This  can  be  done  by 
means  of  small  weekly  payments  from  employees,  supple- 
mented by  contributions  from  employers  and  the  Government 
at  a  rate  reducible  in  proportion  to  the  reduction  of  sickness. 

3.  Include  an  effective  health  measure,  by  linking  the  co- 
operative efforts  of  the  three  responsible  groups  with  the  work 
of  national.  State  and  local  health  agencies,  and  by  utilizing 
these  agencies  in  the  administration  of  the  health  insurance 
system. 

4.  Afford  a  satisfactory  basis  for  the  cooperation  of  the 
medical  profession  with  public  health  agencies. 

5.  Eliminate  the  elements  of  paternalism  and  charity-giving 
by  making  employees  and  the  public,  as  well  as  employers, 
joint  agents  in  the  control  of  this  fund. 

Many  arguments  pro  and  con  have  been  given  In  regard 
to  this  proposition,  of  which  the  following  are  the  most  Im- 
portant In  Its  favor: 

1.  The  existing  agencies  are  Insufficient  to  provide  the  pro- 
tection required. 

2.  The  high  death  and  sickness  rates  among  American 
workers  could  be  reduced  by  a  comprehensive  system  of  In- 
surance. 

3.  Compulsory  Insurance  Is  a  sure  way  of  obtaining  the 
results  desired,  while  private  Insurance  will  always  be  merely 
partial  in  results. 

4.  Cooperative  action  will  Increase  the  Interest  In  health, 
provide  the  insured  with  better  medical  attention  and  Indem- 
nify him  for  loss  of  time  with  less  expense  than  a  private 
system. 

Against  the  system  It  has  been  urged : 

1.  Death  and  sickness  rates  in  the  United  States  are  lower 
under  private  Insurance  than  in  foreign  countries  under  com- 
pulsory health  insurance. 

2.  Compulsory  insurance  will  not  Improve  health  condl^ 
tlons.     A  campaign  of  prevention  would  be  better. 

3.  A  compulsory  system  is  subversive  of  the  fundamental 
principles  of  Individual  initiative  and  freedom  of  action. 


152    INSURANCE  PRINCIPLES  AND  PRACTICES 

4.  The  compulsory  system  is  detrimental  to  the  proper 
relation  between  physician  and  patient,  and  therefore  objec- 
tionable to  both  physician  and  patient. 

5.  Political  influences  and  a  high  expense  rate  would  more 
than  nullify  any  benefits  which  the  system  might  be  able  to 
provide. 


Part  III 

LIABILITY  AND   COMPENSATION 
INSURANCE 


153 


Chapter  XII 
LIABILITY  AND  COMPENSATION   INSURANCE 

Social  insurance. — Industry,  as  carried  on  today,  involves 
certain  hazards  and  losses  which  have  come  to  be  recognized 
as  affecting  the  welfare  of  the  community  as  well  as  of  the  in- 
dividual. This  field  is  covered  by  what  has  been  called  "social 
insurance."  In  European  countries  compensation  insurance 
is  only  one  part  of  a  well-organized  program  of  social  insur- 
ance for  the  community  care  of  the  worker.  It  was  the  first 
section  of  this  program  to  be  introduced  in  the  United  States. 
In  Europe  we  find  governmental  intervention  and  assistance 
in  insuring  the  worker  ( 1 )  against  temporary  impairment  of 
working  capacity  through  industrial  and  other  accidents, 
through  sickness  arising  from  industrial  or  other  diseases, 
through  maternity  and  conditions  of  the  labor  market;  (2) 
against  permanent  inpairment  of  the  ability  to  work  through 
invalidism  or  old  age;  and  (3)  against  financial  loss  conse- 
quent upon  death.  This  is  accomplished  through  burial  insur- 
ance, widows'  and  orphans'  insurance,  health  and  accident  in- 
surance and  compensation  insurance.  In  the  United  States, 
most  of  these  forms  of  insurance  are  voluntary  and  are  con- 
ducted with  little  governmental  interference,  but  compensa- 
tion insurance  against  work  accidents  and  industrial  diseases 
is  the  exception,  being  compulsory  in  many  States. 

Definition. — Liability  and  compensation  insurance  may  be 
defined  as  a  contract  furnishing  protection  to  an  employer 
against  financial  losses  imposed  upon  him  by  court  decision  or 
statute  law  when  a  workman  is  injured  or  diseased  as  a  result 
of  his  occupation.  The  loss  would  result  from  a  court  decision 
under  the  negligence  system  or  from  a  statute  under  the  com- 
pensation system.  Both  forms  of  insurance,  as  is  evident,  are 
founded  on  the  frequency  and  severity  of  industrial  accidents 
and  disease. 

Industrial  accidents. — The  number  and  seriousness  of  in- 
dustrial accidents,  even  at  present,  is  tremendous.  In  1908,  it 
was  estimated  (accurate  figures  being  unavailable)  that  25,000 
persons  were  killed  and  700,000  injured  annually  by  this 
cause.    At  that  time  this  figure  was  considered  an  overestimate, 

155 


156    INSURANCE  PRINCIPLES  AND  PRACTICES 

but  subsequent  investigation  has  shown  that  it  was  probably  too 
small.  An  estimate,  now  in  progress  of  compilation,  will  prob- 
ably show  a  total  of  28,000  killed  in  the  year  1917,  and  3,877,- 
000  injured,  so  that  in  one  year  the  ordinary  injuries  and  loss 
of  life  far  exceeds  the  United  States'  casualties  in  the  entire 
World  War.  The  killed  and  wounded,  if  brought  together, 
would  exceed  the  population  of  Philadelphia.  Estimating  an 
average  life  expectancy  of  25  years,  a  working  year  of  300  days 
and  average  wages  of  $2  per  day  (surely  low  enough),  one 
year's  accidents  cause  a  loss  to  society  of  1,802,984  hours,  and 
a  loss  of  earning  power  of  $1,1 17,790,400.  The  losses  entailed 
fall: 

1.  Upon  the  employee,  through  loss  of  time  and  wages, 

2.  Upon  the  employer,  through  labor  turnover,  friction  with 
employees  and  legal  expenses, 

3.  Upon  society,  through  decreased  productivity  and  the 
necessity  of  caring  for  the  dependents  of  the  injured. 

Distribution  of  accidents. — Many  of  these  accidents  are, 
of  course,  minor  in  character;  otherwise  compensation  pre- 
miums would  be  far  higher  than  they  now  are.  Ninety-seven 
per  cent  of  such  accidents  consisted  of  temporary  total  disabili- 
ties and  only  7/10  of  1  per  cent  were  fatalities.  Of  the  97 
per  cent  which  consisted  of  temporary  total  disabilities  over 
two-thirds  had  a  duration  of  less  than  14  days,  so  that  out  of 
3,905,900  accidents,  2,400,000  of  the  injured  were  able  to  re- 
turn to  work  in  two  weeks  or  less.  From  a  study  of  the  serious- 
ness of  accidents  it  was  possible  to  construct  a  "Standard  Acci- 
dent Table"  which  analyzed  accidents  according  to  their  grav- 
ity, and  this  was  a  valuable  factor  for  some  years  in  the  making 
of  compensation  rates.  By  applying  the  accident  distribution 
to  the  compensation  provided  by  various  State  laws  it  was  pos- 
sible to  find  the  cost  of  100,000  accidents  in  one  State  as  com- 
pared with  the  cost  of  the  same  accidents  in  other  States,  thus 
indicating  the  difference  which  ought  to  exist  between  the  pre- 
miums in  two  States  by  reason  of  the  varying  benefits  allowed 
under  the  laws. 

Prevention  and  insurance. — Some  of  these  accidents  are  due 
to  the  fault  of  the  workman  and  some  to  the  fault  of  the  em- 
ployer, but  a  large  number  may  be  ascribed  to  the  general  haz- 
ard of  industry.  The  latter  term,  however,  includes  all  those 
accidents  to  which  we  are  unable  to  assign  a  cause  on  account 
of  limited  knowledge;  investigation  is  constantly  showing  many 


LIABILITY  AND  COMPENSATION  157 

of  them  to  be  preventable.  A  social  program  should  begin 
with  prevention  and  secondarily  provide  a  system  of  indemni- 
fication for  those  accidents  which  cannot  be  prevented.  The 
latter  is  the  function  of  insurance;  but  since  the  more  efficacious 
the  prevention,  the  lower  the  premiums,  the  two  are  inseparably 
connected,  and  insurance  furnishes  a  highly  important  means  of 
encouraging  a  reduction  in  the  number  and  gravity  of  acci- 
dents. 

Industrial  diseases. — Some  of  the  compensation  laws  of  the 
States  already  include  compensation  for  industrial  diseases. 
Unfortunately,  no  satisfactory  statistics  exist  to  indicate  the 
extent  of  industrial  disease  and  the  losses  caused  by  it,  but  we 
know  it  must  be  a  problem  fully  as  great  as  the  accident  prob- 
lem. Poisons,  germs,  unsatisfactory  ventilation,  dust,  Im- 
proper temperature  and  lighting  conditions  annually  incapaci- 
tate millions  of  workmen.  The  next  great  step  in  compensa- 
tion laws  will  probably  be  tfiF  general  inclusion  of  indemni.fi- 
'cation  for  the  results  of  industrial  diseases. 

Law  of  negligence. — This  was  the  basis  of  liability  insur- 
ance and  Its  abolition  marked  the  initiation  of  compensation 
insurance.  In  England,  prior  to  1837,  the  employee,  if  he  had 
any  rights  against  the  employer  for  injury,  at  the  most  had  no 
more  rights  than  a  stranger.  Even  many  years  later  he  could 
not  recover  damages  from  the  employer  unless  he  could  clearly 
prov^e  that  this  resulted  from  definite  negligence  on  the  part 
of  the  employer.  The  law  later  imposed  certain  obligations 
on  the  employer,  such  as  to  provide  a  safe  place  to  work,  safe 
tools  and  appliances  and  reasonable  carefulness  in  engaging 
workers.  But  certain  defences  developed  during  the  suc- 
ceeding fifty  years  for  the  employer's  protection,  mainly  the 
following: 

1.  Contributory  negligence. — If  the  employee's  negligence 
contributed  to  the  accident  In  the  slightest  degree  he  lost  all 
right  to  collect  damages. 

2.  Fellozv-servant  doctrine. — If  the  employee  was  injured 
as  a  result  of  the  negligence  of  a  fellow-worker,  this  barred  his 
right  to  recovery  on  the  assumption  that  by  working  with  such 
person  he  assumed  the  risks  of  the  latter's  actions. 

3.  Assumption  of  risk  ride. — An  employee  entering  an  em- 
ployment was  presumed  to  accept  all  the  ordinary  and  custom- 
ary risks  of  the  employment,  on  the  ground  that  he  was  paid 
for  accepting  such  risks. 


158    INSURANCE  PRINCIPLES  AND  PRACTICES 

4.  Death  limitation. — In  some  States  the  right  of  action 
against  the  employer  ceased  with  the  death  of  the  injured 
party.  It  was  a  personal  right  and  if  action  was  not  begun  by 
the  injured  party  it  could  not  be  by  his  dependents  after  his 
death. 

5.  Burden  of  proof. — The  burden  was  on  the  plaintiff  to 
show  the  negligence  of  the  employer,  that  the  accident  was  the 
direct  consequence  thereof,  and  that  his  own  negligence  did 
not  contribute  to  the  result.  In  addition  to  these  defences,  it 
was  a  common  practise  for  employers  to  insist  that  the  em- 
ployee, as  a  condition  of  employment,  sign  a  waiver  relieving 
the  employer  of  all  liability  and  thus  contracting  away  his 
legal  rights. 

Beginning  with  the  English  law  of  1880  these  defences  were 
later  modified  by  court  decisions  and  statutes  so  as  to  slightly 
alleviate  the  hard  lot  of  the  workman.  The  contributory  negli- 
gence rule  was  changed  in  some  States  to  the  comparative  negli- 
gence doctrine,  whereby  the  workman  recovered  in  inverse  pro- 
portion to  his  own  negligence.  The  fellow-servant  rule  was 
restricted  in  application  to  those  who  worked  in  the  same  de- 
partment, and  foremen  and  managers  were  no  longer  consid- 
ered fellow  workers.  Failure  to  comply  with  safety  statutes 
was  made  prima  facie  evidence  of  an  employer's  negligence, 
and  increasing  burdens  were  placed  upon  the  employer.  Never- 
theless, the  system  up  to  1910  was  most  unsatisfactory  from 
every  standpoint,  as  shown  later. 

Liability  insurance. — Since  the  injured  employee  might  sue 
the  employer  and  recover  damages  it  was  necessary  for  the 
employer  to  protect  himself  against  loss  by  reason  of  judg- 
ments rendered  against  him  in  such  cases,  which  judgments  were 
occasionally  very  large.  He  purchased,  therefore,  a  liability 
policy,  under  which  an  insurance  company  partly  assumed  the 
risk  of  paying  such  judgments  as  injured  workmen  might  obtam. 
This  type  of  contract  Is  still  valuable  In  States  where  the  com- 
pensation system  has  not  supplanted  the  negligence  system,  to 
furnish  insurance  against  liability  to  others  than  workmen,  and 
as  covering  quasl-employees  whose  status  may  be  doubtful. 

Liability  policy. — In  the  ordinary  contract  in  a  stock  com- 
pany the  Insured  paid  a  premium  which  was  based  upon  his 
payroll,  the  rate  being  quoted  per  $100  of  payroll.  The  prob- 
able payroll  was  estimated  at  the  beginning  of  the  year  and  an 
Initial  premium  paid  which  was  to  be  added  to  or  deducted 


LIABILITY  AND  COMPENSATION  159 

from,  at  the  end  of  the  year,  as  the  ultimate  payroll  happened 
to  be  larger  or  smaller  than  that  estimated.  The  policy  covered 
loss  and  expense  from  legal  liability,  determined  by  a  court 
action  or  by  a  settlement  with  the  injured  party;  the  company 
agreed  and  in  fact  insisted  upon  defending  all  suits  brought; 
and  also  furnished  bonds  and  paid  interest  arising  out  of  suits. 
It  also  assumed  the  expense  of  immediate  surgical  relief.  The 
liability  of  the  company  was  limited  to  $5,000  for  an  injury  to 
one  person  in  one  accident,  and  $10,000  for  injuries  to  more 
than  one  person  in  one  accident,  subject  to  the  $5,000  per  per- 
son limitation.  All  damages  in  excess  of  these  amounts  the  em- 
ployer paid  unless  for  an  extra  premium  he  purchased  a  policy 
with  higher  limits.  Employees  whose  compensation  was  not 
included  in  the  estimate,  employees  of  contractors  and  subcon- 
tractors and  persons  employed  contrary  to  law  were  not  cov- 
ered. The  policy  ran  for  a  term  of  one  year  but  might  be  can- 
celled by  the  company  or  the  Insured  upon  notice,  in  the  former 
case  the  Insured  paying  a  pro  rata  premium,  and  In  the  latter 
case  a  short  rate,  later  described  In  connection  with  the 
fire  Insurance  contract  (Chapter  XIV).  The  insured  agreed 
to  give  prompt  notice  of  accidents  and  claims  to  the  company, 
not  to  settle  claims  or  to  admit  liability,  to  furnish  Immediate 
surgical  relief,  and  to  assist  the  company  by  furnishing  infor- 
mation and  transferring  all  his  rights  to  It  by  subrogation.  The 
company  had  the  privilege  of  inspecting  the  premises  and  books 
of  the  Insured. 

Liability  rates. — While  rate-making  was  originally  an  activ- 
ity of  the  Individual  Insurer  the  Inherent  co-operative  nature 
of  the  process  of  basing  charges  upon  past  experience  made 
common  action  desirable.  This  took  the  form  of  an  association 
of  liability  companies  which,  acting  jointly,  Issued  a  manual 
of  rates  supposed  to  be  binding  upon  all.  The  obstensible  de- 
finlteness  of  these  manual  rates  was  seriously  impaired,  until 
recent  years,  by  competition,  in  the  form  of  rate  reductions  by 
one  expedient  or  another.  The  original  association,  however, 
was  later  replaced  by  a  Bureau,  established  and  maintained  by 
the  companies  for  the  promulgation  of  rates.  While  some 
companies  are  not  members  of  this  Bureau,  we  may  regard 
liability  rates  as  In  general  fixed  by  actuaries,  commonly  em- 
ployed, and  a  Bureau  maintained  by  general  consent. 

Manual  rates  are  made  for  classifications  of  industries,  said  \ 
classifications  being  based  on  the  nature  and  hazard  of  the  In- 


\ 


160    INSURANCE  PRINCIPLES  AND  PRACTICES 

dustry.  Thus,  while  the  rate  for  a  clothing  store  may  be  23 
cents  per  $100  of  payroll,  the  rate  on  a  flour  mill  may  be  $2.25. 
These  rates,  however,  are  not  for  clothing  stores  or  flour  mills 
in  any  particular  location,  and  constitute  no  more  than  a  start- 
ing point  for  ascertaining  the  rate  charged  the  insured.  They 
merely  represent  the  average  variations  In  hazards  between 
Industries,  as  deduced  from  experience  all  over  the  country. 
In  order  to  find  the  rate  for  a  particular  flour  mill  located  in 
a  given  State  a  modifying  factor  must  be  applied  to  this  gen- 
eral rate.  Thus,  we  may  find  that  in  Arkansas  the  rate  is  110 
per  cent  of  the  general  rate  of  $2.25,  or  that  in  Florida  the 
rate  is  50  per  cent  of  the  general  rate  of  $2.25.  It  may  hap- 
pen, of  course,  that  In  some  States  the  rate  is  exactly  100  per 
cent  of  the  general  rate.  An  examination  of  the  factors  which 
enter  into  the  making  of  a  rate  will  show  the  reason  for  this 
arrangement. 

The  liability  contract  protects  against  hazards  of  two  types. 
There  is,  first,  the  accident  hazard  or  the  chance  of  an  em- 
ployee being  injured  in  the  industry;  and  second,  the  negligence 
hazard,  or  the  probability  that  he  will  be  able  to  prove  the  em- 
ployer liable  for  damages.  The  accident  hazard  varies  between 
industries,  while  the  negligence  hazard  varies  with  the  laws 
of  the  different  States.  The  rates  to  cover  these  hazards  are 
derived  from  past  experience  and  It  would  be  possible,  theo- 
retically, to  gather  the  past  experience  on  flour  mills  in  the 
State  of  Arizona  and  to  base  Arizona's  rates  solely  on  that 
experience.  But  practically,  this  would  be  impossible,  because 
the  amount  of  experience  that  could  be  derived  from  this  one 
State  on  flour  mills  and  some  other  Industries  would  be  woe- 
fully Inadequate,  due  to  their  insignificant  number.  There 
would  not  be  sufiiclent  risks  for  the  law  of  average  to  function 
properly.  So  it  is  with  other  Industries  in  other  States,  and  to 
avoid  this  difficulty  the  country  as  a  whole  is  taken  for  com- 
parisons between  industries,  the  assumption  being  that  the  dif- 
ference in  hazard  in  general  between  industries  holds  true  in 
any  particular  State. 

In  collecting  and  using  this  information  for  making  rates 
the  "pure  premium"  is  first  calculated  by  a  comparison  of  the 
losses  Incurred  with  the  payrolls  in  order  to  find  the  losses 
per  $100  of  payroll.     At  any  given  date,  however,  there  are 


LIABILITY  AND  COMPENSATION  161 

many  claims  and  suits  still  unsettled  and  some  estimate  of  the 
ultimate  cost  of  these  must  be  made.  The  pure  premium  is 
multiplied  by  a  factor  in  order  to  derive  the  ultimate  loss  per 
$100  of  payroll  and  also  by  another  factor  to  allow  for  the 
increasing  sympathy  of  juries,  leniency  of  courts  and  modifica- 
tions of  employers'  defences,  all  of  which  cause  the  experience 
to  grow  gradually  worse.  To  this  result  must  be  added  a  sum 
sufficient  to  cover  expenses  and,  in  a  stock  company,  profit; 
these  together  constitute  the  "loading."  The  result  is  the  man- 
ual rate.  This  must  be  modified  for  application  to  individual 
States.  A  comparison  is  made  of  the  experience  of  companies 
in  Florida  with  the  experience  in  the  United  States  as  a  whole, 
and  it  may  be  found,  for  example,  that  Florida  results  show 
losses  per  $100  of  payroll  only  half  as  great  as  the  average 
for  the  United  States.  If  $2.25  is  the  manual  rate  for  the 
classification,  then,  the  rate  for  the  same  classification  in  Florida 
is  50  per  cent  of  that  figure,  or  $1,125. 

These  rates  are  for  policies  containing  the  standard  limits 
previously  described;  if  the  insured  desires  limits  of  $10,000 
and  $50,000  the  premium  will  naturally  be  increased.  In  the 
past  considerable  underwriting  judgment  has  also  been  neces- 
sary to  take  account  of  factors  which  could  not  be  mathematic- 
ally considered  in  the  manual  rate,  or  for  which  past  experience 
did  not  furnish  a  reliable  guide.  Since  one  flour  mill  may  dif- 
fer considerably  from  another  in  hazard,  even  when  located  in 
the  same  State,  some  allowance  for  the  features  of  hazard  of 
a  particular  risk  is  also  necessary. 

Principle  of  compensation. — The  liability  system  was  most 
unsatisfactory  for  the  following  reasons : 

1.  It  was  based  upon  personal  fault,  whereas  many  accidents 
were  due  to  no  personal  fault. 

2.  No  damages  were  recovered  by  injured  workmen  in  from 
25  to  33  1-3  per  cent  of  the  cases. 

3.  The  compensation  paid  bore  no  relation  to  the  needs  or 
justice  of  the  case.     Juries  gave  notoriously  uncertain  verdicts. 

4.  Under  the  contingent  fee  system,  on  the  average,  one- 
fourth  of  the  damages  recovered  by  workmen  went  to  lawyers 
as  fees. 

5.  Damages  were  awarded  only  after  lengthy  litigation,  and 
in  the  meantime  the  workman  or  his  dependents  often  suffered 
severely. 


162    INSURANCE  PRINCIPLES  AND  PRACTICES 

6.  Employers  were  forced  to  spend  large  sums  of  money  in 
the  defense  of  suits,  some  legitimate  and  some  groundless. 

7.  Unpleasant  relations  were  frequently  created  between 
employers  and  workmen  because  of  suits  and  their  results. 

8.  Insurance  was  for  the  benefit  of  the  employer  and  not 
the  injured  party.  In  fact,  the  insurance  company  was  obli- 
gated to  defend  suits  brought  by  workmen. 

9.  The  community  was  assessed  for  the  exorbitant  cost  of 
the  legal  machinery  necessary  to  handle  the  multitude  of  cases. 

10.   Inability  to  recover  damages  for  injuries  led  to  destitu- 
tion, reliance  upon  charity  and  a  lowered  standard  of  living. 
When    the    close    relation    between    employer    and    employee 
ceased,  when  industrial  relations  became  complicated,  when  the 
worker  became  an  impersonal  cog  in  a  great  organization  and 
accidents  multiplied  through  the  introduction  of  machinery,  it 
became  economically  desirable  that  the  negligence  theory  be 
replaced.     This  was  hastened  by  the  growing  social  desire  for 
safety  promotion  and  the  improvement  of  working  conditions. 
Compensation  scraps  the  theory  of  negligence  and  holds  the 
industry  responsible  for  an  industrial  accident.      It  provides  by 
law  a  definite  compensation  for  injuries  instead  of  leaving  this 
to  be  determined  by  a  lawsuit  and  it  makes  the  employer,  as 
the  representative  of  the  industry,  liable  for  the;  payment  of  this 
compensation.     Students  of  economics  will  recognize  that  this 
is  no  hardship  on  the  employer  since,  except  In  the  most  un- 
usual cases,  he  passes  this  cost  on  to  the  consumer  in  the  price 
of  the  product.     The  consumer  of  the  goods,  therefore,  pays 
for  the  wear  and  tear  on  human  machinery  exactly  as  he  al- 
ways did  for  the  wear  and  tear  on  metal  machinery,  cost  of 
raw  material,  wages  of  labor  or  any  other  essential  factor  in 
the  production  of  the  goods. 

The  nature  of  compensation  laws. — Compensation  laws  are 
broadly  divided  into  two  groups,  the  compulsory  and  the  vol- 
untary. In  some  States  the  adoption  of  the  compensation  prin- 
ciple is  compulsory  for  certain  enumerated  "hazardous"  in- 
dustries of  a  private  character  and  voluntary  for  others,  but 
is  usually  compulsory  In  regards  to  employees  of  the  State  and 
for  nearly  all  employments;  and  in  still  other  States  Is  entirely 
voluntary  for  employments  in  general.^     But  where  acceptance 

*  Sec  Appendix  XXI. 


LIABILITY  AND  COMPENSATION  163 

of  the  compensation  principle  is  voluntary  or  optional  the  privi- 
lege is  more  nominal  than  real,  because  in  the  absence  of  ac- 
ceptance the  employer  loses  certain  legal  defences  and  the 
workman  certain  benefits,  which  loss  makes  it  to  their  interest 
to  accept  the  compensation  act.  An  employer  who  belongs  in 
one  of  the  specified  groups  or  who  voluntarily  elects  the  com- 
pensation system  thereby  exchanges  his  liability  to  be  sued  for 
damages  for  a  specified  and  limited  liability  under  the  compen- 
sation law.  Failure  to  accept  the  compensation  law,  however, 
subjects  the  employer  to  the  loss  of  the  common-law  defences 
previously  referred  to.  The  employee  is  presumed  to  accept 
unless  he  specifically  declines. 

General  opinion  now  seems  to  incline  toward  the  universally 
compulsory  act  as  the  best  form  of  law.  It  is  very  common, 
however,  to  find  that  State  laws  do  not  apply  to  casual  labor, 
workers  who  perform  duties  at  their  homes,  domestic  servants 
and  farm  laborers.  Some  State  laws  do  not  cover  what  are 
considered  as  non-hazardous  industries  and  small  establish- 
ments.^ These  exceptions  have  little  to  recommend  them  except 
expediency  and  are  rarely  founded  upon  any  sound  reasoning. 
Prior  to  the  adoption  of  the  compensation  principle  it  was  a 
general  practise  for  employers  to  compel  prospective  employees 
to  "contract  away"  their  legal  remedy  for  Injury  but  this  is  uni- 
versally prohibited  by  compensation  acts. 

Accidents  covered  by  the  laws. — A  common  definition  of 
the  injuries  covered  is  "disability  or  death  resulting  from  an 
accidental  personal  injury  sustained  by  the  employee  arising  out 
of  and  in  the  course  of  his  employment,  except  where  the  in- 
jury is  occasioned  by  the  wilful  intention  of  the  injured  em- 
ployee or  where  the  injury  results  solely  from  intoxication."  In 
the  latter  two  cases,  no  compensation  is  payable  under  the  act. 
It  is  suflicient  to  point  out,  without  entering  upon  the  various  In- 
terpretations given  by  the  courts  of  the  above  provision,  that 
an  injury  "In  the  course  of  employment"  may  not  "arise  out 
of"  it.  For  instance,  a  workman  unloading  rails  may  attempt 
to  light  a  cigar  and  set  fire  to  his  clothes.  The  accident  occurs 
while  working  but  is  not  connected  with  the  duties  for  which 
he  is  engaged.  In  some  States  th^Jaws  cover  accidents  In  the 
course  of  employment,  whether  arising  therefrom  or  not,  and  In 

'See  Appendix  XXI.  ""^ 


164    INSURANCE  PRINCIPLES  AND  PRACTICES 

a  few  States  the  laws  cover  industrial  disease.  The  acts  apply 
to  accidents  occurring  within  or  without  the  State  In  about  one- 
third  of  the  States,  in  another  one-third  only  to  accidents  occur- 
ring within  the  State,  and  in  the  remaining  States  the  laws 
are  not  explicit  in  this  respect. 

Beneficiaries. — Where  the  employee  is  Injured  he  himself 
is  entitled  to  the  benefits,  while  in  case  of  death  they  go  to  his 
beneficiaries.  Although  many  States  provide  a  uniform  sum  or 
percentage  of  wages,  in  at  least  eighteen  States  the  compensa- 
tion varies  with  the  number  and  character  of  dependent  per- 
sons. Children  are  provided  for  In  many  cases  until  they  are 
sixteen  to  eighteen  years  of  age,  and  widows  until  remarriage. 
Some  limitation  Is  usually  placed  upon  the  number  of  depend- 
ents; for  example,  an  act  may  include  only  dependent  parents, 
widow  or  widower  and  children  who  are  under  sixteen  years 
of  age.  If  none  of  these  exist,  brothers  and  sisters  may  be 
brought  within  the  scope  of  the  act.  Aliens  ordinarily  receive 
special  treatment. 

In  order  to  reduce  the  costs  of  the  act  to  a  reasonable  figure, 
the  many  minor  Injuries  are  eliminated  from  consideration  by 
the  provision  of  a  "waiting  period."  Usually,  the  loss  of  time 
involved  must  amount  to  at  least  two  weeks  before  compensa- 
tion becomes  payable.  In  some  States,  the  compensation  dates 
from  the  date  of  the  injury  and  in  others  from  the  expiration 
of  the  waiting  period,  the  latter  being  more  common.  Such  a 
provision  is  often  a  hardship  upon  the  workman  but  seems  nec- 
essary to  prevent  the  otherwise  excessively  high  cost  of  the 
act,  to  reduce  administrative  work,  and  to  prevent  pretended  in- 
jury. 

Benefits  paid. — The  laws  vary  widely  as  to  the  scale  of  bene- 
fits paid.  Four  contingencies  are  practically  universally  cov- 
ered; total  disability,  partial  disability,  specific  Injurles^and 
death. '"Of  these,  some  are  permanent  and  some  temporary.  It 
will  be  sufficient  to  cite  one  fairly  typical  law  which  is  neither 
extremely  liberal  nor  exceedingly  strict,  that  of  Pennsylvania. 
Arranging  and  summarizing  its  provisions  In  order  to  save 
space  and  the  reader's  time,  they  are  as  follows: 

1.  Total  disability. — For  the  first  500  weeks  after  the  tenth 
day  of  total  disability,  60  per  cent  of  the  wages  of  the  injured 
employee,  not  to  exceed  $12  per  week  nor  to  be  less  than  $6 
per  week.     The  total  payment  is  also  limited  to  $5,000. 


LIABILITY  AND  COMPENSATION  165 

2.  Partial  disability. — Sixty  per  cent  of  the  difference  be- 
tween the  wages  of  the  employee  before  injury  and  his  wages 
after  the  injury,  but  not  more  than  $12  per  week  nor  less  than 
$6  per  week,  payable  for  a  maximum  period  of  300  weeks. 

3.  Specific  injuries. 

Loss  of  one  hand — 60  per  cent  of  wages  for  175  weeks. 

Loss  of  one  arm — 60  per  cent  of  wages  for  215  weeks. 

Loss  of  one  foot — 60  per  cent  of  wages  for  150  weeks. 

Loss  of  one  leg — 60  per  cent  of  wages  for  215  weeks. 

Loss  of  one  eye — 60  percent  of  wages  for  125  weeks. 

Loss  of  two  members — 60  per  cent  of  wages  for  the  aggre- 
gate of  the  periods  specified  for  each.  If  such  accident  should 
cause  total  disability  the  above  benefits  are  not  to  exceed  $12 
per  week  nor  to  be  less  than  $6  per  week. 

4.  Death: 

a..  To  a  child  or  children  if  there  be  no  widow  or  widower 
entitled  to  compensation — 30  per  cent  of  the  wages  of  the  de- 
ceased with  10  per  cent  additional  for  each  child  in  excess  of 
two.    The  maximum  is  60  per  cent  of  wages  for  300  weeks. 

b.  To  a  widow  or  widower  without  children — 40  per  cent 
of  wages. 

c.  To  a  widow  or  widower  with  one  child — 50  per  cent  of 
wages. 

d.  To  a  widow  or  widower  with  two  children  or  more — 60 
per  cent  of  wages. 

e.  In  the  absence  of  any  of  the  above  dependents,  then  to 
a  dependent  father  or  mother — 20  per  cent  of  the  wages  if  such 
person  is  partially  dependent  and  40  per  cent  if  wholly  depend- 
ent. 

f.  In  the  absence  of  any  dependents  described  above,  then 
to  a  dependent  brother  or  sister — 15  per  cent  of  the  wages  of 
the  deceased  and  5  per  cent  additional  for  each  additional 
brother  or  sister,  up  to  a  maximum  of  25  per  cent. 

5.  Burial  expenses. — In  all  cases  the  reasonable  expenses  of 
the  last  sickness  and  the  burial  of  the  deceased  are  to  be  paid  to 
the  amount  of  one  hundred  dollars. 

6.  Medical  and  surgical  aid. — During  the  first  thirty  days 
after  disability  the  employer  Is  required  to  furnish  reasonable 
surgical,  medical  and  hospital  care,  medicines  and  supplies  up  to 
the  amount  of  one  hundred  dollars. 


166    INSURANCE  PRINCIPLES  AND  PRACTICES 

Since  the  purpose  of  the  compensation  act  is  to  provide  sup- 
port to  the  injured  person  or  his  dependents,  the  benetits  are 
paid  weekly  or  monthly  in  the  same  manner  as  the  wages  were 
paid.  The  injured  party  or  his  dependents  may,  however, 
apply  for  the  entire  amount  in  a  single  payment,  and  if  they  are 
able  to  convince  the  compensation  board  of  the  desirability  of 
such  an  adjustment  the  board  may  grant  it  with  proper  allow- 
ance for  interest.  In  some  States  six  months  must  elapse  be- 
fore such  an  application  can  be  made,  this  provision  being 
designed  as  a  protection  against  a  hasty  decision  on  the  part  of 
the  injured  party  or  the  beneficiary.  It  will  also  be  noted  from 
the  above  scale  of  benefits  that  the  indemnity  promised  to  the 
injured  party  depends  not  only  upon  the  wages  which  he  was 
earning  at  the  time  of  the  injury  but  also  upon  the  number  of 
persons  dependent  upon  him,  the  closeness  of  their  relation  and 
the  degree  of  dependency. 

The  provisions  regarding  administration  may  be  grouped 
under  four  heads;  the  reporting  of  injuries,  agreement  be- 
tween employers  and  employees,  hearings  of  disputed  claims 
and  appeals  of  the  courts.  The  laws  of  the  States  with  refer- 
ence to  accident-reporting  are  as  varied  as  the  colors  of  the 
rainbow.  Only  nineteen  require  all  accidents  to  be  reported, 
while  many  require  the  reporting  of  accidents  resulting  in  over 
two  or  three  days  disability.  In  some  States  all  employers  are 
required  to  report  accidents;  in  others  only  a  few  arc  so  re- 
quired. In  addition  accident-reporting  laws  are  often  inade- 
quately enforced. 

Settlement  of  claims. — It  is  common  in  compensation  acts  to 
provide  for  the  settlement  of  claims  by  injured  workmen 
through  voluntary  agreements  with  employers.  In  such  cases 
the  agreement  must  be  filed  with  the  Compensation  com- 
mission for  approval,  in  order  to  protect  the  employee 
against  persons  who  would  otherwise  attempt  to  compromise 
on  the  amount  justly  due  him.  Three-fourths  of  the  States 
having  compensation  laws  have  an  arrangement  of  this  type. 
If  the  claim  cannot  be  amicably  adjusted  in  this  manner  the 
rights  of  the  parties  must  be  decided  by  some  State  tribunal.  In 
some  States,  however,  where  all  risks  are  insured  in  a  State 
fund,  the  compensation  is  paid  by  the  fund  upon  the  applica- 
tion of  the  injured  employee  or  his  dependents. 


LIABILITY  AND  COMPENSATION  167 

In  the  States  where  no  compensation  commission  exists  the 
claims  In  disputed  cases  are  presented  to  the  Inferior  courts  for 
settlement;  where  commissions  exist,  the  claims  go  either  to  the 
commission  or  to  some  subordinate  officials  appointed  by  the 
commission.  These  latter  consist  either  of  individual  members 
of  the  commission,  arbitration  committees  or  referees.  In 
all  cases  the  referee  or  arbitration  committee  Is  given  most  of 
the  powers  of  a  court,  but  legal  forms  and  procedure  are  elim- 
inated as  far  as  possible  In  order  to  preserve  the  rights  of  the 
injured  party  and  to  avoid  technicalities.  The  object  of  these 
provisions  Is  to  keep  as  many  cases  as  possible  out  of  the  courts, 
which  used  to  be  swamped  under  the  negligence  system  with 
suits  for  damages. 

The  parties  are  not  wholly  deprived  of  their  right  of  appeal 
to  the  courts,  however.  While  the  findings  of  the  commission 
or  its  referee  as  to  facts  arc  considered  as  final,  matters  of  law 
are  treated  otherwise.  Thus,  either  party  may  appeal  to  the 
courts  for  the  interpretation  of  an  expression  in  the  act, — as 
for  example,  what  is  an  injury? — but  not  to  decide  whether, 
for  example,  a  person  was  intoxicated  when  injured,  wnlch  is  a 
matter  of  fact. 

Insurance  requirements. — One  of  the  most  important  pro- 
visions of  a  compensation  act  is  that  relating  to  insurance.  It 
would  not  be  sufficient  to  make  employers  liable  for  compensa- 
tion without  providing  some  guarantee  that  the  same  will  be 
paid.  In  the  majority  of  States  this  Is  accomplished  by  compel- 
ling the  employer  to  insure  the  risk.  In  five,  however,  the  only 
security  the  employee  has  is  the  provision  making  compensation 
payments  preferred  claims  against  the  property  of  the  employer. 
In  the  States  where  insurance  is  required  the  arrangements 
vary.^  In  some  cases,  a  State  insurance  fund  is  put  in  operation 
which  is  virtually  a  mutual  association  supervised  by  the  State 
and  this  made  the  sole  acceptable  form  of  insurance.  The 
State  here  has  a  monopoly  of  the  compensation  insurance  busi- 
ness. In  other  States  the  employer  may  insure  in  the  State 
fund  or  in  some  recognized  mutual.  In  still  others  he  has  the 
choice  of  the  State  fund,  a  mutual  association  or  a  stock  com- 
pany. These  do  not  always  compete  on  equal  terms,  the  stock 
company's  rates  in  some  States  being  fixed  at  a  figure  higher 

'  See  Appendix  XXII. 


168    INSURANCE  PRINCIPLES  AND  PRACTICES 

than  the  other  Insurers.  In  most  of  the  States  self-insurance  is 
permitted,  the  employer  being  required  to  comply  with  more  or 
less  strict  requirements,  as  the  case  may  be,  In  order  to  satisfy 
the  commission  that  he  is  able  to  carry  his  own  risk. 

Space  does  not  permit  a  summary  of  the  provisions  intended 
to  prevent  accidents  but  it  may  be  said  that  in  general  they  are 
woefully  Inadequate,  the  laws  being  usually  very  defective,  their 
enforcement  very  lax  and  the  Inspectors  Insufficient  in  num- 
ber. 

The  above  summary  is  merely  intended  to  give  a  general  sur- 
vey of  the  nature  of  the  compensation  laws  existing  in  the 
United  States.  It  will  be  apparent  from  what  has  been  said 
that  the  laws  all  vary  to  a  greater  or  lesser  degree  and  an  em- 
ployer can  only  ascertain  his  duties  and  an  employee  his  rights 
by  a  careful  Inspection  of  the  law  in  the  state  or  states  where 
they  are  engaged  in  doing  business. 

Methods  of  insurance. — We  find  four  methods  of  insurance 
in  vogue  for  the  protection  of  employers  against  the  legal 
liability  imposed  by  a  compensation  act;  insurance  in  a  stock 
company,  in  a  mutual  or  reciprocal,  in  a  State  fund,  or  self-in- 
surance. Which  of  these  forms  is  superior  has  not  as  yet  been 
finally  determined.  All  of  them  are  competing  for  business  and 
rival  claims  are  urged  upon  the  attention  of  the  prospects  re- 
garding the  respective  benefits  under  these  plans.  Here  we 
can  only  mention  the  advantages  claimed  by  the  champions  of 
the  various  methods  and  the  disadvantages  set  forth  by  their 
opponents. 

The  stock  company  is  a  corporation  organized  for  profit, 
having  a  capital  stock  on  which  it  is  desired  to  earn  dividends. 
The  contract  It  offers  is  a  perfectly  definite  one,  the  premium 
being  named  in  advance  and  the  policy-holder  never  being 
called  upon  to  pay  anything  additional.  If  the  premium  col- 
lected is  inadequate  the  deficit  is  met  from  the  capital  and 
surplus  of  the  stockholders.  The  insurance  laws  have  been 
framed  to  provide  a  careful  regulation  of  the  methods  followed 
by  such  companies  in  doing  business  and  are  designed  to  Insure 
their  solvency,  a  feature  which  is  very  important  in  compensa- 
tion insurance,  where  payments  to  an  injured  party  often  extend 
over  many  years.  The  capital  and  surplus  together  form  a  mar- 
gin to  work  with  which  protects  the  policy-holders,  a  good 


LIABILITY  AND  COMPENSATION  169 

company  having  a  capital  and  surplus  proportionate  to  the 
amount  of  business  it  does.  This  fund  protects  the  policy- 
holder against  large  and  unforeseen  catastrophes  and  unfortu- 
nate underwriting  experience.  Ordinarily  the  stock  company  is 
of  considerable  size  and  does  business  over  a  wide  territory. 
As  a  result  its  risks  are  of  a  most  diverse  character  and  widely 
scattered,  two  features  which,  as  we  have  seen,  conduce  to  the 
proper  and  regular  working  of  the  law  of  average  on  which 
insurance  is  founded.  It  is  also  argued  that  the  best  manage- 
ment will  be  found  in  the  stock  company  because  the  self-inter- 
est of  the  stockholders  will  impel  them  to  see  that  the  concern 
is  economically  and  efficiently  managed.  The  management  of 
the  stock  company  is  theoretically  free  from  political  entangle- 
ments and  permanent  In  character.  The  stock  companies 
obtain  their  business  through  a  system  of  agents  who  receive 
a  commission  on  the  business  they  write.  In  return,  it  is  said 
that  the  agent's  services  are  valuable  in  selecting  risks.  In  edu- 
cating the  policy-holder  and  in  giving  service  to  the  employer. 
The  mutual  association^  has  no  capital  stock  and  consists  of  a 
number  of  employers  who  form  a  group  In  which  every  member 
Is  an  Insurer  as  well  as  an  Insured.  The  policy-holders  control 
the  management  and  since  no  dividends  are  paid  a  member  Is 
entitled  to  any  savings  which  result  on  the  estimated  cost  but 
likewise  assumes  the  obligation  of  making  good  any  deficit. 
Since  there  are  no  dividends  to  be  paid  and  usually  very  little 
In  the  way  of  commissions  to  agents,  the  mutuals  claim  to  be 
able  to  do  business  at  a  much  lower  cost  than  the  stock  com- 
panies. The  association  Is  controlled  by  the  policy-holders  and 
since  the  officers  are  usually  policy-holders.  It  Is  maintained 
that  the  association  will  always  be  operated  in  the  Interest  of, 
and  for  the  benefit  of  the  policy-holders.  Although  the  stock 
company  operates  over  a  wider  territory,  the  mutual  In  a  defi- 
nite locality  has  the  advantage  of  strictly  enforcing  high  stand- 
ards of  prevention  and  protection  which  reduce  accidents  and 
consequently  cost.  In  addition,  the  risks  may  be  very  carefully 
inspected  so  as  to  give  a  select  group  on  which  losses  may  be 
much  lower  than  on  a  group  of  risks  Indiscriminately  selected. 
It  Is  possible  for  a  mutual  to  render  a  great  service  In  the  pre- 
vention of  accidents,  because  the  cost  of  insurance  Is  directly 
dependent  upon  these  accidents  and  any  accidents  which  the 

*  See  Appendix  XXVII. 


170    INSURANCE  PRINCIPLES  AND  PRACTICES 

employers  prevent  are  unquestionably  and  directly  a  benefit 
to  themselves.  Such  prevention  would  also  be  beneficial  in  the 
stock  company  if  the  rates  were  lowered  as  a  consequence, 
which  is  the  case  under  the  experience  rating  system  described 
later. 

The  reciprocal  is  in  many  respects  similar  to  a  mutual.  Here 
however,  an  attorney-in-fact  who  controls  the  operation  of  the 
reciprocal  is  appointed  to  represent  the  members.  The  mem- 
bers are  liable  for  assessments  as  in  a  mutual  and  there  is 
often  some  attempt  to  limit  the  extent  of  an  assessment,  al- 
though the  legality  of  this  is  questionable.  It  will  be  evident 
that  the  success  of  the  reciprocal  is  very  largely  dependent  upon 
the  integrity  and  ability  of  the  attorney-in-fact. 

The  State  fund  is  a  mutual  created  and  managed  by  the 
State  and  usually  receiving  certain  privileges  therefrom,  such 
as  immunity  from  taxation  or  the  assistance  of  a  fund  to  start 
business.^  The  rates  for  insurance  are  usually  lower  in  the  State 
fund  and  may  be  reduced  still  further  by  the  return  of  divi- 
dends. It  is  claimed  that  the  insurance  is  cheaper  by  reason 
of  efiicient  management  ~in""fhe  interests  of  the  public. 
Inasmuch  as  some  of  the  expenses  of  this  fund  are  often 
defrayed  by  the  State  it  is  difficult  to  compare  satis- 
factorily the  cost  of  this  insurance  with  the  cost  under 
the  stock  and  mutual  plans.  In  some  cases  the  law 
provides  that  insurers  in  this  fund  are  absolutely  relieved  of  all 
liability  for  payments  of  compensation,  and  under  these  cir- 
cumstances the  employer  gets  absolute  security.  The  State  fund 
usually  provides  no  indemnity  against  liability,  however,  so  that 
in  cases  where  through  a  legal  technicality  the  Injured  party 
might  sue  the  employer.  It  would  Inadequately  protect  him. 
This  fund  is  sometimes  made  a  monopoly,  and  in  this  case  it 
eliminates  all  the  vast  wastes  of  competition  and  avoids  the 
expense  of  duplication  of  personnel  and  facilities  which  other- 
wise would  be  necessary.  It  Is  claimed,  on  the  other  hand,  that 
this  is  an  Invasion  of  the  private  rights  of  individuals  and  that 
the  State  is  virtually  depriving  private  insurers  of  the  right  to 
do  business.  The  State  fund,  if  of  a  competitive  character, 
forms  an  effective  and  valuable  means  of  compelling  reason- 
able rates  and  efficient  service  on  the  part  of  the  private  com- 
panies.    Many  such  funds  have  been  criticized,  however,  as 

'See  Appendix  XXVIII  for  a  statement  of  a  State  fund's  operation. 


LIABILITY  AND  COMPENSATION  171 

being  wasteful  and  inefficient.  The  policy-holders  have  only 
an  indirect  voice  in  the  management  of  the  enterprise.  Incase 
of  insolvency,  either  employers  will  have  to  contribute  through 
"assessments  or  else  employees  will  suffer  through  failure  to  re- 
ceive the  compensation  due.  It  is  important  to  notice  the  argu- 
ment that,  since  many  compensation  laws  make  insurance  com- 
pulsory, agents  and  their  commissions  are  an  unnecessary  waste 
and  that  if  the  State  compels  a  man  to  insure  it  should  also 
secure  for  him  a  means  of  doing  so  at  the  least  possible  cost 
and  in  the  best  manner. 

'  Self-insurance  is  the  carrying  by  an  employer  of  his  own  risk 
by  periodically  setting  aside  amounts  in  a  fund  to  pay  losses 
when  incurred.  By  this  method  the  employer  saves  all  the 
expense  incidental  to  the  organization  of  an  insurance  company 
and  is  assured  of  paying  only  the  cost  of  his  own  industry.  He 
need  not  worry  about  the  equitableness  of  rates  as  between  his 
industry  and  other  industries,  or  between  himself  and  others 
in  the  same  industry.  This  plan  is  most  directly  connected  with 
the  subject  of  accident  prevention.  Any  accidents  prevented 
will  Immediately  and  directly  accrue  to  the  advantage  of  the 
individual  employer  and  it  consequently  furnishes  a  powerful 
incentive  to  provide  every  means  of  safety;  in  other  plans  the 
amount  saved  through  accident  prevention  may  or  may  not  go 
to  the  employer  who  makes  the  greatest  efforts  in  this  direction. 
But  the  employer  assumes  all  the  trouble  and  expense  which 
would  be  taken  care  of  by  the  Insurance  company  If  he  insured 
in  a  private  company,  and  the  employee  runs  the  risk  of  find- 
ing the  employer  unable  to  pay  claims  when  due.  A  catastrophe 
involving  a  large  loss  may  exceed  the  employer's  assets,  forc- 
ing him  Into  insolvency.  Furthermore,  It  is  difficult  for  the 
State  to  keep  watch  of  his  financial  condition  for  the  protection 
of  employees;  an  employer  who  is  solvent  today  may  be  Insol- 
vent tomorrow.  The  employer  Is  directly  Interested  in  reduc- 
ing claims  and  may  therefore  try  to  deprive  workmen  of  the 
benefits  properly  due  them;  but  it  has  recently  been  claimed  that 
other  insurers  have  tried  to  do  this  same  thing. 

The  compensation  policy. — This  differs  from  the  liability 
contract  In  that  the  amounts  payable  are  limited  only  by  the 
compensation  law  of  the  State  and  the  contract  Is  as  much  for 
the  protection  of  the  employee  as  the  employer.  The  provi- 
sions relating  to  premium  payments  are  very  similar  to  those 


172    INSURANCE  PRINCIPLES  AND  PRACTICES 

of  the  liability  policy  and  likewise  the  sums  and  events  covered, 
with  the  exception  noted  above.  The  contract  is  for  one  year, 
with  privilege  of  cancellation  by  either  party.  Certain  legal 
provisions  are  incorporated  which  make  the  contract  a  real 
protection  to  the  employee.  The  provisions  applying  after  an 
accident  are  very  similar  to  those  found  in  the  liability  contract, 
with  the  exception  of  that  relating  to  insurance  in  more  than 
one  company.  The  provisions  of  the  contract  are  very  clearly 
set  forth  in  the  document  itself,  which  Is  reproduced  in  an 
appendix.^ 

Workmen's  compensation  rates. — Workmen's  compensa- 
tion rates,  like  liability  insurance  rates,  are  made  by  concerted 
action.  The  most  important  rate-making  body  is  the  National 
Council  on  Workmen's  Compensation  Insurance,  a  federation 
of  the  State  rating  boards  and  bureaus  throughout  the  United 
States,  whose  object  is  to  form  a  central  clearing  house  for 
the  exchange  of  ideas  and  for  the  solution  of  statistical 
problems  connected  with  rate-making.  The  work  of  this 
organization  is  chiefly  accomplished  through  committees,  on 
which  the  various  members  are  represented,  the  results  of 
the  committees'  efforts  being  adopted  by  the  members  of  the 
council.  Many  States  hav^e  compensation  rating  boards, 
which  exercise  jurisdiction  over  the  rates  in  their  territory.  A 
member  is  not  compelled  to  adopt  the  conclusions  reached  by 
the  National  Council.  Because  of  its  national  character  and 
the  completeness  of  Its  representation,  however,  the  National 
Council  is  probably  the  most  important  single  rate-making 
body  in  the  United  States. 

Compensation  rates  may  fundamentally  be  divided  into  two 
classes;  manual  rates  and  merit  rates.  The  former  are  pub- 
lished in  a  manual  and  show  for  each  classification  of  Industries 
the  rate  which  it  would  be  necessary  to  charge  In  order  to  pay 
the  average  losses  and  expenses  of  that  classification  for  the 
country  as  a  whole  and  yield  a  reasonable  profit  to  the  com- 
pany.^ But  the  manual  rate,  while  most  important  as  a  starting 
point  for  all  rates,  Is  not  necessarily  the  final  rate  charged  to^ 
the  purchaser  of  insurance.  In  order  to  do  justice  between 
individual  employers  schedule  rates  have  been  devised  which 
take  into  account  the  tangible  features  of  the  individual  risk, 
and   also   experience   rates   which   are   based   upon   the   past 

•See  Appendix  XXIII. 

'  See  Appendices  XXIV  and  XXV. 


I 


LIABILITY  AND  COMPENSATION  173 

history  of  the  risk  in  question.  We  will  begin,  however,  with 
a  consideration  of  the  manual  rates,  inasmuch  as  these  form  the 
basis  of  the  compensation  rating  system. 

A  rate  to  be  adequate  must  be  sufficient  to  cover  three  items 
of  cost;  (1)  the  pure  premium  which  covers. the  amount  ex- 
pected to  be  paid  in  benefits,  (2)  the  loading  for  expenses 
sufficient  to  cover  the  cost  of  management  and  obtaining  busi- 
ness and  (3)  the  profit  of  a  stock  company.  In  computing  the 
pure  premium  it  is  necessary  to  obtain  an  amount  which  will  be 
sufficient  to  cover  not  merely  the  initial  benefits  paid  under 
policies  but  the  ultimate  benefits,  which  may  extend  over  a  long 
period  of  years.  This  involves  an  estimate  of  the  outstanding 
liabilities  of  a  compensation  insurance  company  and  renders 
the  problem  more  difficult  than  it  otherwise  would  be.  Likewise, 
we  find  that  many  industries  are  so  inadequately  represented 
in  some  States  that  the  experience  of  such  industries  classi- 
fied by  States  is  too  meagre  for  rate-making  purposes.  To 
avoid  the  latter  condition  a  statistical  assumption  must  be  em- 
ployed. This  latter  point  must  be  immediately  disposed  of  as 
it  is  a  fundamental  part  of  the  compensation  rate-making  sys- 
tem. 

Since,  for  example,  we  cannot  depend  upon  the  past  experi- 
ence on  coal  mining  in  Michigan  to  fix  a  rate  for  coal  mines  in 
that  State,  nor  upon  the  experience  on  clothing  manufacturing 
In  Arizona  to  determine  a  premium  on  this  industry  in  that 
particular  State,  and  since,  In  fact,  there  are  many  industries 
which  are  not  adequately  represented  in  all  States,  the  differ- 
ence between  the  pure  premiums  on  various  Industries  must  be 
determined  primarily  on  the  basis  of  the  experience  on  each  in- 
dustry in  the  country  as  a  whole  or  at  least  in  several  States. 
This  means  a  comparison  of  the  losses  per  $100  of  payroll  on 
contracting  work,  for  example,  as  compared  with  the  losses  per 
$100  of  payroll  on  bakeries.  But  the  various  States  have  dif- 
ferent compensation  laws  and  the  losses  will  be  influenced  by 
the  provisions  of  the  acts.  In  other  words,  as  the  losses  stand, 
they  are  not  comparable,  and  before  being  added  together  to 
arrive  at  the  general  experience,  must  be  reduced  to  a  common 
level.  For  this  purpose  a  reduction  factor  or  factors  must  be 
used  which  will  approximately  measure,  for  instance,  the  differ- 
ence between  New  York  and  Pennsylvania  conditions.  One 
reduction  factor  Is  inadequate  for  the  purpose  and  several  have 
therefore  been  employed.     For  death  and  permanent  total  dis- 


174    INSURANCE  PRINCIPLES  AND  PRACTICES 

ability  losses,  the  average  cost  per  case  is  determined  from 
past  experience  in  each  State,  and  by  multiplication  there  can 
be  found  what  New  York  accidents  would  have  cost  in  Penn- 
sylvania or  what  Pennsylvania  accidents  would  have  cost  in 
New  York.  As  regards  minor  injuries  and  other  benefits,  the 
two  States  are  reduced  to  a  parity  by  the  comparison  of 
payrolls  and  losses,  thus  finding  what  the  cost  of  the  benefits 
paid  in  Pennsylvania  would  have  been  if  the  payroll  of  Penn- 
sylvania were  the  same  as  the  payroll  of  New  York.  These 
two  types  of  calculations  are  necessary  because  the  proportion 
of  serious  injuries  to  the  total  number  varies  between  States, 
due  to  the  character  of  the  industries. 

When  by  this  method  one  or  more  reduction  factors  have 
been  found  for  each  State,  the  losses  for  the  country  as  a  whole 
can  be  grouped  together  for  individual  classifications  of 
industries  and  occupations  and  compared  with  the  payrolls  of 
individual  classifications.  This  comparison  shows  the  loss 
which  is  to  be  expected  upon  each  $100  of  payroll,  on  the  aver- 
age, in  each  classification.  This  might  be  56  cents  for  auto- 
mobile manufacturing  or  $2.29  for  can  manufacturing,  to 
assume  figures  for  illustration. 

The  next  problem  Is  to  pass  back  from  the  premiums  com- 
puted on  the  basis  of  combined  experience  to  premiums  which 
will  reflect  the  different  conditions  prevailing  In  individual 
States.  The  rates  computed  above  are  for  average  conditions, 
while  some  States  are  above  and  some  below  the  average. 
Evidently  this  may  be  done  by  reversing  the  process  followed 
in  finding  the  reduction  factors,  and  the  factors  accomplishing 
the  result  are  called  translation  factors.  The  translation 
factor  for  death  and  permanent  total  disability  Is  found  by  the 
average-value  method  described  above,  while  the  factor  for 
"all  other"  and  "medical"  losses  is  the  reciprocal  of  the  reduc- 
tion factor  for  the  same.  Thus,  from  the  general  experience 
on  Individual  classifications.  State  premiums  for  individual 
classifications  are  arrived  at.  In  Pennsylvania,  for  example, 
the  premiums  on  automobile  and  can  manufacturing,  respec- 
tively, might  be  assumed  to  be  $1.00  and  $4.00. 

One  further  factor  must  be  taken  into  consideration.  In 
the  above  calculation  the  experience  of  past  years,  say  1916-17, 
served  as  a  basis;  but  the  premiums  are  to  be  computed  for 
business  to  be  written  In  1920.  Losses  may  be  increasing  or 
decreasing,  relative  to  payrolls  during  this  period.     A  rough 


LIABILITY  AND  COMPENSATION  175 

approximation  to  such  increase  or  decrease  is  obtained  by  find- 
ing the  loss  ratios  (losses  to  premiums)  at  the  two  dates, 
assuming  that  the  rate  of  premium  was  the  same.  If  the  loss 
ratio  of  1916-17  was  S6  per  cent,  and  that  of  1919  was  53 
per  cent,  it  would  indicate  that  the  premiums  we  have  found 
should  be  discounted  by  5.4  per  cent,  to  allow  for  declining 
losses.  Thus  the  above  rate  illustrations  would  become  95 
cents  and  $3.78,  respectively. 

To  this  must  be  added  an  allowance  for  expenses  and  profit, 
and  the  result  will  be  the  manual  rate.  Suppose  that  in  States 
where  ordinary  taxation  is  levied,  expenses  are  found  to  equal 
38  per  cent,  of  the  manual  rate,  distributed  about  as  follows: 

Acquisition   Cost  17.5  per  cent. 

Home  Office  Administration   8.0     "       " 

Inspection  and  Accident  Prevention 2.0     "       " 

Adjustment  of   Claims    7.0     "       " 

Taxes    3.5     "       " 

Total    38.0     " 

Then  the  above  pure  premium  of  95  cents  must  be  increased 
to  $1.53  in  order  to  cover  these  expenses.  The  amount  of 
$1.53  (the  manual  rate)  is  found  by  dividing  the  pure  pre- 
mium (95  cents)  by  (1 — .38).  In  the  rate  manual  this 
Information  may  be  presented  in  various  ways.  For  example, 
the  rate  manual  will  furnish  the  name  and  description  of  each 
classification,  a  special  number  designating  the  same  and  a 
symbol  indicating  the  manual  rate.  By  reference  to  separate 
sheets,  the  meaning  of  the  symbols  in  dollars  and  cents  may 
be  found  for  any  individual  State. ^  Another  method  consists 
in  the  preparation  of  a  separate  sheet  for  each  State,  contain- 
ing all  the  classification  numbers  and  opposite  each  its  manual 
rate  for  that  State. 

Merit  rating. — The  manual  rate  in  compensation  insurance 
may  be  superseded  by  (1)  a  schedule  rate  or  (2)  an  ex- 
perience rate.  We  will  proceed  to  consider  these  two  systems 
of  rating  in  the  order  given. 

Schedule  rating. — The  system  of  schedule  rating  is  designed 
to  measure  the  visible  elements  of  hazard  and  to  fix  the  rate 
according  to  the  results  of  this  measurement.  The  process 
includes  briefly  the  following  steps : 

a.  The  establishment  of  certain  standards  of  safety  in  indus- 
trial plants  and  operations. 

b.  The  inspection  of  risks  to  determine  how  nearly  such 
risks  approach  or  excel  the  standards  established. 

*For  a  sample  page  of  manual  and  rate  sheet  see  Appendices  XXIV  and  XXV. 


176    INSURANCE  PRINCIPLES  AND  PRACTICES 

c.  An  Increase  or  decrease  in  the  rate  for  deviation  from 
the  standards  established. 

A  schedule  Is  usually  divided  into  three  principal  parts.® 
The  first  portion  deals  with  the  structural  hazards,  such  as  the 
character  of  the  building  and  the  equipment.  The  second  por- 
tion covers  the  mechanical  hazards,  such  as  the  machinery 
employed  in  the  various  operations.  The  third  portion  refers 
to  the  morale  of  the  plant,  Including  safety  organization,  ac- 
cident prevention,  etc. 

Under  each  of  these  sections  systems  of  adding  to  or  sub- 
tracting from  the  manual  rate  are  applied.  For  defects  to 
which  only  a  limited  number  of  employees  are  exposed  the 
process  of  adding  a  flat  sum  to  the  premium  is  followed,  because 
this  hazard  consequently  will  not  vary  with  the  payroll.  For 
defects  which  affect  all  kinds  of  industries  equally  there  is 
added  a  certain  sum  per  $100  of  payroll  In  order  that  the 
charge  may  vary  with  amount  of  insurance  and  not  according 
to  the  rate.  For  defects  whose  influence  varies  with  both  the 
number  of  employees  and  the  nature  of  the  industry  there  is 
added  a  percentage  of  the  manual  rate,  which  therefore  causes 
this  charge  to  vary,  not  only  In  accordance  with  the  rate 
charged,  but  also  with  the  amount  of  payroll. 

The  advantages  of  schedule  rating  are  the  following: 

a.  The  establishment  of  different  rates  for  risks  which  are 
within  the  same  general  classification  but  vary  from  the  average 
risk  of  that  classification. 

b.  The  direction  of  attention  of  the  employer  to  specific 
defects  which  require  a  remedy. 

c.  It  enables  the  Insured  to  reduce  the  rate  by  remedying 
the  bad  features  of  his  risk. 

d.  It  furnishes  an  incentive  for  accident  prevention. 

In  its  present  state,  however,  the  system  is  open  to  the  crit- 
icism that  It  considers  only  the  tangible  elements  of  hazard 
and  does  not  adequately  measure  the  Intangible  elements.  An- 
other difficulty  is  that  there  is  not  suflUcIent  statistical  justifica- 
tion for  the  various  charges  and  credits  Involved.  In  this  con- 
nection It  must  be  remembered  that  it  Is  very  difl^cult  to  say 
how  many  additional  cents  of  loss  are  added  by  any  particular 
unguarded  machine.  As  applied  thus  far  the  schedule  sys- 
tem has  resulted  In  a  deficit  in  premiums  to  the  companies, 

"  See  sample  page  of  schedule  in  Appendix  XXVI. 


LIABILITY  AND  COMPENSATION  177 

whereas  the  net  result  of  the  application  of  the  system  should 
be  the  collection  of  an  equal  amount  of  premiums  from  the 
total  number  of  risks.  The  loss  in  premiums  from  risks  which 
are  above  the  average  should  be  exactly  counterbalanced  by 
the  additional  premiums  collected  from  risks  which  are  below 
the  average.  In  practice,  also,  the  establishment  of  arbitrary 
credit  limits  has  checked  the  incentive  towards  the  prevention 
of  accidents. 

Experience  rating. — This  Is  designed  to  measure  both  the 
intangible  and  tangible  elements  of  hazard  by  comparing  the 
loss  experience  of  the  individual  risk  with  the  loss  experience 
of  a  group  of  risks,  with  the  idea  of  modifying  the  manual 
rate  favorably  or  unfavorably  as  the  comparison  is  favorable 
or  unfavorable.  Ordinarily  such  a  plan  Is  limited  to  risks 
with  a  payroll  of  a  certain  size  and  a  loss  experience  cover- 
ing three  or  four  years.  The  process  Is  divided  into  the  fol- 
lowing steps : 


a.  The  Insured  submits  a  schedule  showing  his  audited  pay- 
roll for  the  required  period  and  the  losses  which  have  oc- 
curred during  that  period,  classified  according  to  their  char- 
acter. 

b.  These  schedules  are  analyzed  to  find  what  proportions 
of  the  premium  are  paid  for  deaths  and  permanent  total  dis- 
ability and  for  temporary  disability  and  medical  benefits. 

c.  The  losses  are  similarly  analyzed  so  as  to  show  in  detail 
the  actual  experience  of  the  risk  in  question. 

d.  If  the  comparison  of  losses  with  premiums  is  favorable, 
the  insured  Is  entitled  to  a  percentage  reduction  of  the  manual 
rate  and  if  unfavorable,  the  manual  rate  Is  increased. 

The  advantages  of  experience  rating  are  the  following: 

a.  It  enables  the  owner  of  a  good  risk  to  obtain  some  reduc- 
tion from  the  rate  charged  the  average  risk  of  the  class. 

b.  It  is  a  form  of  merit  rating  which  Is  applicable  to  all 
risks,  whereas  schedule  rating  could  hardly  be  applied  to  an 
industry  like  the  contracting  business. 

c.  It  covers  the  invisible  elements  of  hazard. 

d.  The  experience  rating  plan.  If  satisfactorily  worked  out, 
gives  the  Insured  in  a  stock  company  or  mutual  the  principal 
advantage  of  self-Insurance;  that  Is,  efforts  toward  prevention 
directly  benefit  him  by  the  reduction  of  his  premiums. 


178    INSURANCE  PRINCIPLES  AND  PRACTICES 

Liability  and  compensation  insurance  reserves. — As  with 
other  forms  of  insurance,  the  state  has  here  intervened  for 
the  protection  of  the  policy-holders.  In  the  early  days  of  lia- 
bility insurance,  the  reserves  kept  were  at  the  discretion  of  the 
insurance  company  and  were  based  upon  the  officials'  estimates 
of  what  was  necessary.  The  protection  afforded  to  the  policy- 
holder by  the  State  must  provide  that  the  insurance  company 
shall  not  use  the  premiums  of  the  policy-holder  until  It  renders 
the  protection  for  which  such  premiums  have  been  paid,  an 
object  which  the  law  accomplishes  by  two  kinds  of  reserves. 
These  are  (1)  the  unearned  premium  reserve  and  (2)  the 
loss  reserve. 

The  unearned  premium  reserve  consists  of  the  unearned 
premiums  as  ascertained  by  an  approximate  method  of  cal- 
culation. This  reserve  In  liability  and  compensation  Insur- 
ance Is  no  different  from  the  reserve  In  fire  Insurance.  Sup- 
posing the  examination  of  the  company  to  be  made  In  Decem- 
ber, some  policies  have  been  written  In  January  and  some 
In  December,  some  in  February  and  some  In  November,  etc., 
so  that  the  average  life  of  the  policies  Is  six  months.  All 
compensation  and  liability  policies  are  written  for  a  term  of 
one  year,  so  that  in  December  one-half  of  the  premiums  writ- 
ten during  that  year  may  be  considered  as  earned  and  one-half 
as  unearned.  The  unearned  premium  reserve  is  therefore  that 
proportion  of  the  premium  represented  by  the  ratio  of  the  un- 
expired policy  period  to  the  total  term  of  the  policy.  The 
New  York  law  reads  as  follows:  "The  superintendent  of 
insurance  shall  charge  as  liabilities.  In  addition  to  the  capital 
stock,  the  premium  reserve  on  policies  In  force,  equal  to  the 
unearned  portions  of  the  gross  premiums  charged  for  cover- 
ing the  risks,  computed  on  each  respective  risk  from  the  date 
of  the  Issuance  of  the  policy."  It  Is  customary  for  state  insur- 
ance departments  to  accept  a  computation  of  the  premium  re- 
serve on  the  yearly  basis  Indicated  above  and  fully  described 
in  the  chapter  on  the  fire  insurance  reserve,  although  an  un- 
earned premium  reserve  calculated  on  a  monthly  basis  would 
be  more  accurate. 

In  view  of  the  extensive  treatm.ent  of  the  subject  In  the  chap- 
ter on  the  fire  insurance  reserve,  we  need  only  summarize  here 
the  reasons  for  an  unearned  premium  reserve,  which  are: 
"\.       1.  The  premium   for  the  unexpired   term   must  be   considj^ 


LIABILITY  AND  COMPENSATION  179 

ered  as  held  in  trust  for  the  policy-holder,   the  product  for 
which  it  was  paid  having  not  yet  been  delivered. 

2.  It  is  essential  to  know  the  unearned  premium  and  the 
reserve  held  against  this  liability  in  order  to  determine  the 
solvency  of  the  company. 

3.  The  unearned  premium  reserve  would  be  necessary  for 
re-insurance  premiums  if  the  company  desired  to  suspend  busi- 
ness and  to  re-insure  its  risks  in  another  company. 

If  it  were  not  for  the  peculiar  nature  of  the  liability  and 
compensation  insurance  business  the  reserve  indicated  above 
would  be  sufficient.  The  liability  of  a  fire  insurance  company 
on  a  fire  insurance  policy  is  determined  at  the  date  when  the 
policy  expires;  no  fire  occurring  after  that  time  can  increase 
the  company's  liability  and  all  those  which  have  occurred  dur- 
ing the  term  of  the  policy  are  already  known.  In  fact  the 
claims  upon  most  of  them  have  been  settled.  In  the  liability 
and  compensation  business  the  event  insured  against  must  also 
occur  within  the  term  of  the  policy  but,  as  explained  previously, 
notices  and  claims  will  be  made  after  the  term  of  the  policy 
has  expired,  and  the  future  liability  of  the  company  by  the 
nature  of  the  circumstances  Is  somewhat  indefinite.  Law  suits 
may  be  started  which  will  be  In  the  courts  for  years  after  the 
term  of  the  policy  has  ended.  Most  of  the  company's  pay- 
ments are  therefore  made  on  a  policy  after  the  terrn  of  that 
policy  has  expired,  and  at  the  moment  of  examination  its 
obligations  are  mainly  in  the  future  and  not  in  the  past. 
Against  these  obligations  some  reserve  must  be  provided  and 
this  is  the  function  of  the  loss  reserve. 

The  loss  reserve  may  be  defined  as  that  sum  which,  to- 
gether with  Interest,  will  be  sufficient  to  meet  the  known  and 
unknown  obligations  which  may  arise  from  accidents  which 
have  already  occurred.  It  will  be  recognized  that  the  obliga- 
tions on  future  accidents  will  be  met  out  of  the  unearned 
premium  reserve  and  the  obligations  on  past  accidents  out  of 
the  loss  reserve.  The  loss  reserve  will  obviously  be  more  diffi- 
cult to  compute  than  the  unearned  premium  reserve  and  it  Is 
not  surprising  that  the  lawmakers  have  not  been  highly  suc- 
cessful in  the  past  In  providing  a  proper  standard  for  It. 
Nevertheless  a  proper  loss  reserve  Is  of  the  highest  Importance, 
because  It  insures  the  future  solvency  of  the  company  and  gives 
the  employer  some  assurance  that  the  claims  made  by  em- 
ployees will  be  provided  for. 


180    INSURANCE  PRINCIPLES  AND  PRACTICES 

The  first  and  prime  requisite  of  this  reserve  is  sufficienqr, 
and  this  is  the  principal  object  which  lawmakers  have  been 
working  to  obtain,  but  it  is  complicated  by  the  fact  that  an 
excessive  reserve  is  undesirable.  Such  excessive  reserve  Is  de- 
rived from  premiums  which  must  be  thereby  unduly  increased, 
and  when  later  the  reserve  is  found  to  be  excessive,  the  excess 
goes  as  dividends  to  the  stockholders,  or  if  a  mutual  company, 
is  returned  to  policy-holders  other  than  those  who  contributed 
it.  A  company  might  also  use  the  excess  reserve  so  accumu- 
lated for  purposes  of  competition.  In  addition  to  this  diffi- 
culty, changing  conditions  make  the  experience  of  the  past 
inapplicable  to  the  future.  This  will  be  more  readily  observed 
by  examining  some  of  the  bases  which  have  been  used  for  the 
calculation  of  the  loss  reserve. 

These  methods  briefly  stated  are  as  follows: 

1.  The  individual  estimate  method  consists  in  an  estimate 
by  the  insurance  company  officials  of  a  sum  which  will  be  nec- 
essary to  cover  each  particular  case.  It  means  that  each  case 
is  considered  individually  according  to  the  circumstances  sur- 

"rounding  It  and  It  therefore  entails  an  enormous  amount  of 
work.  In  the  past  the  Insurance  officials  have  been  inclined 
generally  to  underestimate  their  outstanding  liabilities.  This 
method  fails  to  establish  any  common  standard,  so  that  while 
one  company  may  be  setting  aside  excessive  amounts,  another 
may  be  making  woefully  inadequate  provision  for  the  future. 

2.  The  pure  premium  method  assumes  that  since  the  pure 
premium  is  supposed  to  represent  the  probable  loss  costs  on 
policies,  it  may  be  used  as  an  index  of  the  necessary  reserve. 
The  pure  premium  minus  what  has  already  been  paid  out  in 
losses  should  give  the  required  reserve  for  future  liabilities. 
This  method  would  be  correct  if  pure  premiums  were  always 
accurate  and  adequate,  but  if  they  are  not  the  method  falls 
to  the  ground.  What  the  State  Is  interested  in  is,  not  what 
actually  remains  out  of  premiums  to  meet  future  liabilities, 
but  what  sum  the  company  should  have  on  hand  to  meet  future 
liabilities. 

3.  The  average  cost  method  depends  upon  ascertaining 
from  past  experience  the  average  cost  of  a  notice  of  Injury, 
a  claim  by  an  Injured  party  and  a  suit  to  recover  damages  or 
compensation.  Having  the  experience  of  the  past  on  notices, 
claims  and  suits,  it  was  thought  easy  to  apply  this  knowledge 
to  the  number  of  notices,  claims  and  suits  at  the  time  of  exan^ 


LIABILITY  AND  COMPENSATION  181 

ination  and  subtract  from  the  total  what  had  already  been 
paid  on  such  notices,  claims  and  suits.  But  the  records  of 
the  insurance  companies  of  notices  in  some  cases  were  far  from 
satisfactory,  the  method  gave  the  companies  an  opportunity 
to  manipulate  the  figures,  and  it  was  difficult  to  name  a  suit- 
average  cost  in  the  law  because  of  the  great  variation  between 
localities  and  different  classes  of  business. 

4.  The  actual  loss  ratio  method  consists  In  ascertaining 
from  past  experience  the  ratio  of  losses  to  gross  premiums.  A 
similar  loss  ratio  is  then  assumed  for  the  policies  undef'con- 
sideration  and  from  the  total  amount  so  ascertained  is  de- 
ducted any  payments  already  made  by  the  company.  This 
method  is  more  simple  in  application  and  may  be  more  easily 
checked  by  the  authorities.  It  assumes,  however,  that  the  ex- 
perience of  the  past  will  be  true  of  the  future,  and  if  condi- 
tions are  radically  changing  this  may  not  be  true.  It  has  also 
the  same  objection  as  the  pure  premium  method  in  that  it  is 
dependent  to  some  extent  upon  premiums,  which  may  not  be 
correct. 

5.  The  fixed  loss  ratio  method  substitutes  for  the  loss  ratio 
of  actual  experience  a  ratio  prescribed  by  law.  This  legal 
ratio  is  based  upon  experience  but  upon  the  experience  of  many 
companies  instead  of  one.  This  is  the  method  most  recently 
adopted  and  appears  to  work  better  than  the  former  methods 
in  use.  These  various  methods  have  often  been  combined. 
Thus,  in  some  States  the  average  cost  method  was  used  for 
policies  which  had  been  In  existence  for  some  time  and  the 
loss  ratio  method  was  used  for  policies  more  recently  written, 
subject,  however,  to  checking  by  the  average  cost  method. 
The  average  cost  method  and  the  fixed  loss  ratio  method  have 
also  been  combined. 

The  law  of  New  York  will  serve  as  a  good  Illustration  of 
the  regulation  now  In  existence.  It  must  be  remembered  that 
while  the  law  of  New  York  can  only  affect  companies  doing 
business  within  that  State,  a  list  of  such  companies  would  In- 
clude many  of  the  prominent  companies  of  the  United  States, 
and  the  law  affects  not  only  their  business  written  In  New  York 
State  but  their  total  business.  The  New  York  law  therefore 
forms  a  minimum  reserve  requirement  for  all  companies  doing 
any  business  within  Its  borders.  This  law  is  divided  into  two 
parts,  the  first  pertaining  to  the  liability  business  and  the  second 
to  the  compensation  insurance  business. 


182    INSURANCE  PRINCIPLES  AND  PRACTICES 

With  reference  to  liability  insurance,  the  law  provides: 

a.  $1,500  reserve  shall  be  on  hand  for  each  liability  suit 
being  defended  under  policies  written  ten  years  prior  to  the 
date  of  the  statement. 

b.  $1,000  reserve  shall  be  on  hand  for  each  liability  suit 
being  defended  under  policies  written  five  and  less  than  ten 
years  prior  to  the  date  of  statement. 

c.  $850  reserve  shall  be  on  hand  for  each  liability  suit  being 
defended  under  policies  written  three  and  less  than  five  years 
prior  to  the  date  of  statement. 

d.  For  liability  policies  written  during  three  years  imme- 
diately preceding  the  date  of  statement,  the  reserve  on  hand 
shall  be  60  per  cent  of  the  earned  premiums,  less  all  losses 
and  expense  payments  made  under  such  policies.^" 

It  will  be  noticed  that  items  a,  b,  and  c  above,  are  based 
upon  the  average  cost  method,  while  item  d  is  the  loss  ratio 
method,  60  per  cent  of  earned  premiums  being  the  assumed 
ratio  of  future  losses  to  premiums. 

For  compensation  insurance  reserves  the  law  provides  the 
following : — 

a.  A  reserve  for  all  compensation  claims  under  policies  writ- 
ten more  than  three  years  prior  to  the  date  of  statement  equal 
to  the  present  value  of  the  determined  and  estimated  future 
payments. 

b.  A  reserve  for  all  compensation  claims  under  policies  writ- 
ten in  the  three  years  immediately  preceding  the  date  of  state- 
ment, equal  to  6S  per  cent  of  the  earned  premiums  of  each  of 
these  three  years  less  all  loss  and  expense  payments  made  under 
such  policies. ^^ 

This  law  has  been  adopted  in  Massachusetts,  Pennsylvania 
and  in  many  other  States  of  the  union,  but  is  not  considered 
by  insurance  officials  as  entirely  satisfactory.  The  average  costs 
are  based  upon  old  experience  which  may  not  be  of  much  value 
as  far  as  the  future  is  concerned.  Also,  it  does  not  provide 
sufficient  restrictions  for  new  companies  just  entering  business 
whose  premiums  may  or  may  not  be  adequate.  This  criticism 
particularly  applies  to  the  liability  portion  of  the  business.  It 
will  also  be  noted  that  the  percentage  of  earned  premiums  is 

^But  for  the  first  of  such  three  years,  the  reserve  shall  not  be  less  than  $750 
for  each  suit  being  defended. 

"Provided  however  that  for  the  first  year  of  such  three-year  period  the  re- 
serve shall  not  be  less  than  the  present  value  of  the  determined  and  estimated 
compensation  claims  under  the  policies  of  that  year. 


LIABILITY  AND  COMPENSATION  183 

a  percentage  of  gross  premiums  which  include  expenses,  so 
that  a  reduction  in  expenses  would  bring  a  reduction  in  re- 
serves, which  is  far  from  logical.  It  has  been  suggested  that 
the  average  cost  method  might  be  applied  to  the  more  recent 
policies  as  a  check  upon  the  fixed  loss  ratio  method. 


Part  IV 
FIRE  INSURANCE 


185 


Chapter  XIII 

INSURABLE  INTEREST  IN  FIRE  INSURANCE 

A  common  statement  In  texts  on  Insurance  Is  that  policies  of 
insurance  relating  to  the  loss  or  destruction  of  property  prom- 
ise reimbursement  based  on  indemnity.  On  this  principle  the 
insured  would  always  receive  the  actual  cash  value  of  the 
property  at  the  time  of  the  loss.  This  Is  not  quite  accurate, 
in  view  of  the  valued  policies  Issued  in  marine  and  certain 
forms  of  casualty  insurance  and  other  less  obvious  violations 
of  the  principle;  but  it  is  true  that  the  law  has  in  the  main 
gladly  recognized  the  protection  against  moral  hazard  which 
is  given  by  an  actual  interest  In  insured  property  approximately 
equivalent  to  the  face  of  the  policy. 

Reasons  for  insurable  interest. — The  purpose  of  all  prop- 
erty Insurance  is,  therefore,  to  indemnify  a  loser.  If  only 
those  who  suffer  loss  are  to  receive  reimbursement,  none  save 
those  who  may  be  injured  should  be  permitted  to  secure  pro- 
tection, and  then  only  to  the  extent  that  they  are  threatened 
with  loss.  Fire  insurance,  and  life  insurance  covering  the 
life  of  a  debtor  in  favor  of  a  creditor,  present  similar  restric- 
tions. But  we  have  seen  that  the  insurable  interest  of  a  per- 
son in  his  own  life  is  usually  unlimited,  the  courts  of  many 
States  having  decided  that  it  is  impossible  to  calculate  the 
value  of  human  life.  In  marine  and  casualty  insurance  also, 
the  Interpretation  of  insurable  interest  is  relaxed.  Fire  in- 
surance policies  Issued  for  more  than  the  maximum  possible 
loss,  however,  are  considered  over-Insurance,  and  while  in  the 
absence  of  fraud  or  "valued  policy  laws"  these  policies  sel- 
dom work  harm,  the  total  absence  of  any  interest  in  the  prop- 
erty makes  an  Insurance  policy  on  the  same  a  mere  wager. 
A  person  holding  a  policy  of  this  type  cannot  gain  by  the 
continued  existence  of  the  property  and  Is  not  interested  in 
its  preservation;  on  the  contrary,  he  can  make  a  profit  by  its 
destruction  and  the  moral  hazard  Is  therefore  tremendously 
Increased.  Periods  of  poor  business  and  decreasing  values 
have  given  ample  proof  of  this.     Where  the  value  of  the 

187 


188    INSURANCE  PRINCIPLES  AND  PRACTICES 

property  is  difficult  to  ascertain  and,  as  a  result,  excessive 
insurance  is  obtained,  this  same  moral  hazard  attachcs^.though 
in  a  lesser  degree.  Heavier  losses  to  the  insuring  companies 
and  consequently  heavier  premiums  for  everybody  are  the 
natural  results  of  a  deficiency  in  insurable  interest.  Hence, 
as  a  matter  of  public  policy,  an  insurable  interest  is  desirable 
and  even  necessary. 

The  method  adopted  by  fire  insurance  companies  to  protect 
themselves  against  these  hazards  is  the  careful  selection  of 
persons  to  whom  they  issue  policies.  It  should  be  kept"  th 
mind  that  while  we  speak  of  insurance  on  property  the  in- 
surance does  not  actually  protect  the  property  itself  but  is 
instead  a  personal  contract  protecting  an  individual  or  cor- 
poration. Therefore  if  the  record  of  the  applicant  for  a 
policy  is  open  to  suspicion  the  insurance  company  will  prob- 
ably refuse  to  grant  a  contract,  particularly  if  the  party  has 
ever  been  involved  in  any  of  those  losses  which  give  rise  to 
the  suspicion  that  Providence  has  been  assisted  by  human 
agency. 

What  constitutes  insurable  interest. — Because  the  possible 
range  of  insurable  interest  is  wide  its  existence  is  often  diffi- 
cult to  ascertain  and  its  definition  always  difficult.  Many  defi- 
nitions have  been  formulated,  of  which  the  following  clause 
from  the  codified  laws  of  one  State  is  a  fair  example — "every 
interest  in  property  or  in  relation  thereto  or  liability  in  respect 
thereof,  of  such  a  nature  that  a  contemplated  peril  may  di- 
rectly damnify  the  insured."  Another  definition,  short  but 
to  the  point,  is  to  the  effect  that  "as  long  as  the  insured  has  a 
direct  pecuniary  interest  in  the  preservation  of  the  property 
he  possesses  an  insurable  interest."  Observe  that  neither  own- 
ership nor  possession  are  necessary,  but  a  right  which  may  be 
prejudicially  affected  or  a  liability  created,  whether  actual  or 
contingent,  is  considered  sufficient.  However,  the  "utility 
test"  is  possibly  easier  to  apply  than  any  of  the  above.  Thus, 
if  the  realization  of  a  contemplated  peril  may  adversely  affect 
the  use  of  an  object,  the  party  or  parties  thereby  affected 
possess  an  insurable  interest  to  the  extent  of  the  damage  that 
might  result  with  respect  to  such  use.  The  uses  to  which 
property  is  put  are  almost  as  varied  as  the  circumstances  in 
which  men  find  themselves,  and  insurable  interests  therefore 
often  develop  in  most  unexpected  places.  To  cite  a  few  com- 
mon examples  of  diminished  utility,  there  are  the  cases  of 


INSURABLE  INTEREST  189 

an  owner  whose  property  is  destroyed  in  whole  or  In  part; 
a  bailee,  who  loses  the  privilege  of  keeping  property  for  hire; 
or  a  commission  man  who  is  deprived  of  the  usefulness  of  an 
article  as  an  object  of  sale,  by  which  sale  he  expects  to  earn 
a  commission;  or  a  mortgagee  who  loses  part  of  his  security 
for  the  debt  through  damage  to  mortgaged  property. 

Classification  of  insurable  interests. — The  more  frequent 
instances  of  insurable  interest  may  be  conveniently  divided  into 
five  classes : 

1.  The  interest  of  an  actual  owner,  sole  and  unconditional. 
This  is  the  simplest  and  most  frequent  case. 

2.  The  interest  of  a  representative  or  agent  of  the  owner, 
as  for  instance,  a  custodian,  commission  man,  bailee  or  ware- 
houseman. 

3.  The  interest  of  a  tenant  arising  from  the  consequential 
losses  of  a  fire,  as  the  loss  of  use  of  property  on  which  rent 
is  payable,  the  detriment  to  a  lessee  from  the  destruction  of 
the  leased  property,  the  injuries  covered  by  a  use  and  occu- 
pancy clause,  etc. 

4.  The  interest  arising  from  legal  liability  for  the  property 
of  others,  as  in  the  case  of  common  carriers,  bailees  for  hire 
and  lessees. 

5.  The  interest  of  a  party  holding  property  as  security  for 
a  debt,  such  as  the  interest  of  a  mortgagee.  The  importance 
of  this  latter  type  of  interest  warrants  a  separate  discussion 
of  it. 

Protecting  the  mortgagee.^ — It  might  be  inferred  from  the 
preceding  discussion  that  only  one  person  can  have  an  insur- 
able interest  in  a  given  property  at  a  given  time.  This,  how- 
ever, is  not  the  case,  since  quite  often  there  is  a  creditor  or 
lessee  who  needs  protection  as  well  as  the  owner.  One  of 
the  most  frequent  instances  of  more  than  one  concurrent  In- 
surable interest  arises  from  the  relation  created  by  a  mort- 
gage. The  courts  have  long  recognized  the  existence  of 
more  than  one  insurable  interest  In  mortgaged  property,  the 
mortgagor  having  an  insurable  interest  equivalent  to  the  value 
of  the  property,  while  the  mortgagee  can  carry  Insurance  equal 
to  the  amount  of  the  debt. 

^This  section  is  virtually  a  reproduction  of  the  material  contained  in  an  ar- 
ticle by  Robert  Riegel,  "Protection  of  a  Mortgagee's  Interest  by  Insurance", 
which  appeared  in  the  Journal  of  Political  Economy,  December,  1915,  and  is 
used  here  through  the  courtesy  of  the  publishers  of  the  above  periodical. 


190    INSURANCE  PRINCIPLES  AND  PRACTICES 

There  have  been  several  methods  whereby  these  two  In- 
terests have  been  protected  and  because  of  their  importance 
considerable  space  will  be  devoted  to  a  description  of  them. 
While  under  any  method  the  mortgagee  has  some  protection, 
its  extent  is  not  equal  under  all  circumstances  or  under  all 
jurisdictions.  His  status  is  subject  to  interpretation  by  the 
intermediate  courts  and  the  courts  of  last  resort  of  the  forty- 
eight  States  besides  the  Federal  courts,  although  the  tendency 
of  all  of  them  is  to  favor  him  as  much  as  possible.  The  fol- 
lowing are  five  principal  methods  that  have  been  used  to  insure 
the  mortgagee : 

1.  Mortgagee's  policy  covering  his  own  interest. — Here  the 
mortgagee  takes  out  separate  insurance  for  his  own  benefit, 
in  which  the  mortgagor  has  no  rights  whatsoever.  However, 
since  he  possesses  an  insurable  interest,  the  latter  may  obtain 
a  policy  on  the  same  property  for  his  own  protection  if  he 
chooses  to  do  so. 

In  case  of  loss  under  this  method  and  payment  to  the  mort- 
gagee, the  insuring  company  becomes  possessed  of  the  con- 
tractual right  to  collect  at  the  maturity  of  the  mortgage  a 
sum  equal  to  the  indemnity  paid.  To  permit  otherwise  would 
be  to  grant  the  mortgagee  double  indemnity.  He  would  col- 
lect the  amount  of  the  loss  from  the  insurance  company  and 
his  claim  on  the  mortgagor  would  be  undiminished.  There- 
fore the  insurance  company  becomes  subrogated  to  the  rights 
of  the  mortgagee  to  the  extent  of  the  indemnity  paid.  An 
illustration  will  make  this  clearer.  Let  us  assume  that  O 
possesses  a  property  valued  at  $10,000  which  he  has  mort- 
gaged to  M  for  a  loan  of  $9,000.  M  insures  his  interest  in 
Company  J  for  $9,000  and  a  loss  of  $8,000  subsequently 
occurs.  The  insurance  company,  J,  pays  M  $8,000  and  by 
subrogation  acquires  M's  right  to  collect  $8,000  from  O  at 
the  expiration  of  the  term  of  the  mortgage,  M  retaining  the 
right  to  collect  at  that  time  the  remaining  $1,000  due  him. 
The  insurance  company,  if  it  can  ultimately  collect  the  $8,000 
from  O,  loses  nothing.  If  O  refuses  to  pay  foreclosure  may 
be  had  and  If  the  property  brings  only,  say,  $8,500,  the  com- 
pany loses  $500,  since  it  cannot  legally  In  the  collection  of  its 
claim  against  O  prejudice  In  any  way  M's  contractual  right 
to  $1,000.  An  alternative  settlement  is  the  payment  to  M  by 
J  of  $9,000  and  the  latter's  acquisition  by  subrogation  of  a 


INSURABLE  INTEREST  191 

claim  for  $9,000.  This  is  the  law  in  every  State  except  Massa- 
chusetts. 

The  advantages  of  this  method  arc  few  and  accrue  only  to 
the  mortgagee.  It  gives  him  double  indemnity  in  one  State, 
Massachusetts,  and  if  he  disapproves  of  the  insurer  selected 
by  the  mortgagor  he  may  secure  more  satisfactory  protec- 
tion. The  disadvantages  to  the  mortgagee  arc  that  he  must 
supervise  the  insurance  and  also  pay  the  premiums.  Such 
separate  insurance  is  also  disadvantageous  to  the  insurance 
company,  since  it  increases  the  difficulty  of  supervision,  tne 
moral  hazard,  and  the  danger  of  non-concurrent  policies. 

2.  Assignment  of  the  mortgagor's  policy.^  —  A  second 
method  is  the  assignment  to  the  mortgagee  of  a  policy  held  by 
the  mortgagor.  The  efficacy  of  this  method  is  doubtful,  since  the 
mortgagee  acquires  by  assignment  only  such  rights  as  the 
mortgagor  possesses  at  the  time  of  assignment.  A  fuller  ex- 
planation of  assignment  is  given  at  the  end  of  this  chapter. 
These  rights  depend  to  some  extent  upon  the  nature  of  the 
assignment  and  the  jurisdiction.  Violations  or  misrepresen- 
tations may  have  voided  the  policy  and  in  many  States  the 
mortgagee  would  then  obtain  a  valueless  piece  of  paper.  Sec- 
ondly, the  mortgagee  often  has  no  legal  status  as  a  contracting 
party  and  consequently  may  not  be  entitled  to  notice  of  ap- 
praisal, to  participate  in  negotiations  after  a  loss,  to  redress 
if  the  mortgagor  agrees  to  an  inadequate  settlement  of  the 
claim,  etc. 

3.  Indorsement  of  a  "loss  payable  clause." — ^A  more  ex- 
tensively used  method  of  obtaining  Insurance  of  a  mortgagee's 
Interest  Is  the  Indorsement  upon  the  mortgagor's  policy  of  the 
so-called  "loss  payable  clause,"  stipulating  "loss.  If  any,  pay- 
able to  ,  as  his  interest  may  appear."^     From 

the  standpoint  of  the  companies  this  is  desirable  in  some  States 
because  of  the  liability  of  the  mortgagee  for  the  acts  of  the 
mortgagor,  and  in  general  because  of  the  elimination  of  sep- 
arate insurance  of  interests  In  the  same  property  and  the  re- 
duction of  the  moral  hazard.  But  the  desirability  of  such 
a  method  from  the  mortgagee's  standpoint,  It  is  to  be  strongly 
emphasized,  entirely  depends  upon  the  State  where  it  is  used; 
there  being  two  radically  different  Interpretations  of  his  rights. 

The  first  of  these  is  that  such  an  indorsement  renders  the 

'  See  form  on  p.  195. 
'See  Appendix  XXXVII. 


192    INSURANCE  PRINCIPLES  AND  PRACTICES 

mortgagee  an  appointee  and  representative  of  the  mortgagor 
to  receive  the  insurance  money.  Where  this  is  the  law  no 
method  could  afford  him  less  protection  than  the  "loss  pay- 
able clause,"  since  it  subjects  him  to  all  the  defenses  available 
against  the  mortgagor,  without  the  rights  of  the  latter.  Not 
being  legally  a  party  to  the  contract,  an  award  is  binding  on 
him,  the  election  to  build  or  repair  may  be  exercised  without 
notice  to  him,  and  he  suffers  all  the  disadvantages  of  the 
previous  method. 

In  marked  contrast  are  the  States  which  consider  the  in- 
dorsement of  a  "loss  payable  clause"  the  creation  of  an  un- 
conditional, independent  contract  between  the  insurance  com- 
pany and  the  mortgagee.  When  thus  favored,  this  method 
cannot  be  surpassed,  since  the  mortgagee  is  not  bound  by  the 
conditions  of  the  policy,  the  acts  of  the  mortgagor  cannot  be 
set  up  as  a  defense  against  him,  and  yet  he  possesses  all  the 
rights  of  the  mortgagor. 

4.  The  "standard  mortgagee  clause" — Of  all  the  methods 
of  protecting  the  mortgagee's  interest  the  most  prevalent,  be- 
cause of  its  general  effectiveness,  is  the  indorsement  on  the 
mortgagor's  policy  of  a  "standard  mortgagee  clause."  One 
form  of  such  clause  is  here  given  :^ 

MORTGAGEE  CLAUSE 

Loss  or  damage,  if  any,  under  this  policy,  shall  be  payable  to 

as mortgagee  (or  trustee),  as  interest  may  appear,  and  this  insur- 
ance as  to  the  interest  of  the  mortgagee  (or  trustee)  only  therein,  shall  not  be 
invalidated  by  any  act  or  neglect  of  the  mortgagor  or  owner  of  the  within  de- 
scribed property,  nor  by  any  foreclosure  or  other  proceedings  or  notice  of  sale 
relating  to  the  property,  nor  by  any  change  in  the  title  or  ownership  of  the  prop- 
erty, nor  by  the  occupation  of  the  premises  for  purposes  more  hazardous  than 
are  permitted  by  this  policy.  PROVIDED,  that  in  case  the  mortgagor  or  owner 
shall  neglect  to  pay  any  premium  due  under  this  policy,  the  mortgagee  (or 
trustee)  shall,  on  demand,  pay  the  same. 

PROVIDED,  also,  that  the  mortgagee  (or  trustee)  shall  notify  this  company 
of  any  change  of  ownership  or  occupancy  or  increase  of  hazard  which  shall  come 
to  the  knowledge  of  said  mortgagee  (or  trustee)  and,  unless  permitted  by  this 
policy,  it  shall  be  noted  thereon  and  the  mortgagee  (or  trustee)  shall  on  de- 
mand pay  the  premium  for  such  increased  hazard  for  the  term  of  the  use  thereof ; 
otherwise  this  policy  shall  be  null  and  void. 

This  company  reserves  the  right  to  cancel  this  policy  at  any  time  as  provided 
by  its  terms,  but  in  such  case  this  policy  shall  continue  in  force  for  the  benefit 
only  of  the  mortgagee  (or  trustee)  for  ten  days  after  notice  to  the  mortgagee 
(or  trustee)  of  such  cancellation  and  shall  then  cease,  and  this  company  shall 
have  the  right,  on  like  notice,  to  cancel  this  agreement. 

Whenever  this  company  shall  pay  the  mortgagee    (or  trustee)    any  sum  for 

*  See  also  Appendices  XXXII  and  XXXIII. 


INSURABLE  INTEREST  193 

loss  or  damage  under  this  policy  and  shall  claim  that,  as  to  the  mortgagor  or 
owner,  no  liability  therefor  existed,  this  company  shall,  to  the  extent  of  such 
payment,  be  thereupon  legally  subrogated  to  all  the  rights  of  the  party  to  whom 
such  payment  shall  be  made,  under  all  securities  held  as  collateral  to  the  mort- 
gage debt,  or  may  at  its  option  pay  to  the  mortgagee  (or  trustee)  the  whole 
principal  due  or  to  grow  due  on  the  mortgage  with  interest,  and  shall  thereupon 
receive  a  full  assignment  and  transfer  of  the  mortgage  and  of  all  such  other 
securities;  but  no  subrogation  shall  impair  the  right  of  the  mortgagee  (or 
trustee)  to  recover  the  full  amount  of claim. 

Dated 

Attached  to  and  forming  part  of  Policy  No 

of  the of Agency  at 

Agent. 

Such  favorable  treatment  as  Is  outlined  in  the  clause  is 
accorded  mortgagees  by  insurance  companies  because  of  the 
former's  inability  to  control  the  acts  of  their  debtors,  their 
recognized  right  to  protection,  and  their  usual  excellence  as 
moral  risks.  By  such  a  clause,  it  will  furthermore  be  noticed, 
the  right  to  subrogation  is  reiterated  and  acknowledged  in 
the  contract.  An  indorsement  of  this  nature  creates  what  is 
substantially  an  independent  contract  between  the  insurer  and 
the  mortgagee.  The  word  "independent"  is  thus  qualified 
because  two  lines  of  decisions  are  existent  on  the  liability  of 
the  mortgagee  for  his  debtor's  acts.  In  four  States  he  has 
been  declared  entirely  unaffected  by  such  acts,  whether  com- 
mitted prior  or  subsequent  to  the  indorsement  on  the  policy 
of  the  "mortgagee  clause."  In  four  other  States  he  has  been 
held  exempt  from  the  consequences  of  acts  occurring  after  Its 
indorsement.  In  one  of  these  States,  the  provisions  of  the 
standard  policy  after  line  59  (which  refer  to  conditions  after 
a  loss)  were  held  to  be  Inapplicable  and  not  binding  on  the 
mortgagee.  He  Is  privileged  to  submit  proofs  of  loss,  to 
receive  notice  of  appraisal  and  to  be  exempt  from  the  "re- 
build or  repair"  provision. 

Illustrations  will  serve  to  define  distinctly  the  nature  of  the 
settlement  of  claims  under  the  "mortgagee  clause."  Let  us 
suppose  that  the  value  of  O's  property  is  $10,000,  that  the  same 
is  mortgaged  to  M  for  $4,000,  and  that  O  obtains  a  fire  in- 
surance policy  for  $4,000  from  Company  J  on  which  a  "stand- 
ard mortgagee  clause"  Is  indorsed  for  M's  protection.  A 
loss  of  $3,000  occurs.  Company  J  will  pay  to  M,  the  mort- 
gagee, $3,000.     O,  the  owner,  having  an  Interest  In  the  policy, 


194    INSURANCE  PRINCIPLES  AND  PRACTICES 

however,  is  entitled  to  protection,  and  therefore  is  credited 
by  M  with  $3,000  in  liquidation  of  the  debt,  being  thus  reim- 
bursed for  the  $3,000  damage  to  his  property.  An  equiva- 
lent settlement  would  have  been  for  J  to  pay  M  $4,000,  then 
to  take  over  M's  claim  against  O  of  $4,000,  and  credit  O  with 
$3,000  toward  payment  of  the  same. 

A  situation  may  exist,  however,  where  O  has  violated  the 
terms  of  the  insurance  contract  and  J  disclaims  all  liability 
to  him.  In  this  contingency,  when  M  receives  $3,000  from 
the  insurance  company,  instead  of  O  receiving  $3,000  toward 
the  payment  of  the  debt,  the  insurance  company  is  subrogated 
to  $3,000  of  M's  claim  against  O  at  the  expiration  of  the 
mortgage.  Thus  O  loses  $3,000  because  his  policy  was  void, 
and  the  settlement  is  made  as  though  O  has  never  had  an  in- 
terest in  the  insurance. 

For  the  ordinary  mortgagee  the  indorsement  of  the  "mort- 
gagee clause"  affords  the  best  protection  in  most  States.  Its 
advantages  may  be  summarized  as  follows: — 

a.  The  prejudicial  effect  of  the  mortgagor's  acts  on  the 
mortgagee's  rights  is  considerably  diminished  in  some  States 
and  entirely  eliminated  in  others. 

b.  The  mortgagee  acquires  legal  rights  as  a  party  to  the 
insurance  contract. 

c.  The  mortgagee  is  exempt  in  some  States  from  certain 
provisions  of  the  standard  policy,  such  as  the  "repair  and 
rebuild  clause"  and  the  provisions  applying  after  a  loss. 

It  has  disadvantages,  in  comparison  with  other  methods,  in 
only  a  few  jurisdictions.  It  is  inferior  to  the  "loss  payable 
clause"  in  a  limited  number  of  States  and  is  not  as  profitable 
as  the  separate  insurance  of  the  mortgagee's  interest  in  Massa- 
chusetts. 

5.  Special  contracts. — An  even  more  satisfactory  method  of 
completely  protecting  the  mortgagee  is  the  formation  of  a 
special  contract  between  insurer  and  mortgagee,  embracing 
exceptional  features  for  the  latter's  benefit.  This,  however, 
is  chiefly  used  by  trust  companies  and  large  lenders  who  place 
a  great  deal  of  insurance  of  this  nature. 

Assignment  of  fire  policies. — When  property  is  transfer- 
red or  pledged  as  collateral  it  is  often  necessarily  accompanied 
by  protection.  Usually  the  property  is  insured,  and  for  trans- 
fer it  is  not  always  necessary  to  secure  a  new  policy,  but  merely 
the  proper  assignment  of  the  old  one.     This  avoids  a  can- 


INSURABLE  INTEREST 


195 


cellation  of  the  policy  by  the  insured,  which  would  mean  a 
higher  premium  due  to  the  short  rate  charged  when  a  policy- 
holder cancels  his  policy.  Then,  too,  in  the  case  of  pledge, 
the  real  owner  contemplates  the  redemption  of  his  goods  and 
if  it  were  not  for  the  possibility  of  assignment  the  unnecessary 
issuance  of  a  third  policy  would  be  involved.  For  there 
would  be  the  policy  which  he  held  as  owner,  a  second  policy 
issued  to  the  pledgee,  and  later,  when  the  property  was  re- 
deemed, a  third  policy  protecting  the  original  owner  would  be 
needed  to  replace  the  two  cancelled. 

The  policy  provision  relating  to  assignment. — Recognizing 
the  necessity  of  assignment  and  the  need  for  uniformity  of 
action  when  a  policy  is  assigned,  it  is  customary  for  standard 
policies  to  contain  clauses  governing  assignment,  and  there  is 
usually  a  restriction  stipulating  that  unless  otherwise  pro- 
vided in  writing  and  added  to  the  policy  it  shall  be  void  if 
assigned  before  a  loss.^  The  object  of  this  restriction  is  to 
prevent  an  assignment  to  an  undesirable  person.  The  insur- 
ance policy  is  a  personal  contract  and  assignment  without  any 
supervision  or  restrictions  means  insuring  greater  moral  haz- 
ard and  the  frequent  payment  of  claims  to  persons  whom  the 
companies  possibly  would  not  originally  have  insured.  Thus, 
it  is  not  only  fair  to  the  insurance  company  but  also  to  the 
premium  payers  that  the  company  should  decide  with  whom 
they  wish  to  contract. 

Methods  of  assigning. — So  frequently  is  Insurance  assigned 
that  most  policies  have  two  forms  printed  on  the  back  for 
the  purpose,  one  for  the  assignment  by  the  insured  and  the 
other  for  the  consent  of  the  insurer.  Unless  specified  in  the 
policy  no  particular  form  is  necessary  either  for  the  assign- 
ment or  the  consent,  but  if  it  is  prescribed,  then  any  assign- 
ment not  in  entire  compliance  is  incomplete. 

ASSIGNMENT  OF  INTEREST  BY  INSURED 

The  interest  of as  owner  of  the  property  covered  by 

this  Policy  is  hereby  assigned  to subject  to  the 

consent  of  The  Insurance  Company,  New  York. 


(Signature  of  the  Insured) 


Dated 19 

"See  Appendix  XXX,  line  31. 


196    INSURANCE  PRINCIPLES  AND  PRACTICES 

CONSENT  BY  COMPANY  TO  ASSIGNMENT  OF  INTEREST 

The   Insurance  Company,  New  York,  hereby  consents  that  the 

interest  of as  owner  of  the  property 

covered  by  this  Policy  be  assigned  to 

Agent. 

Dated 19 

The  assignment  need  not  be  in  writing,  as  a  verbal  assignment 
might  possibly  be  held  sufficient  in  certain  cases.  In  securing 
consent,  however,  express  agreement  is  usually  necessary,  ob- 
tained through  a  properly  authorized  official  or  agent  of  the 
company.  Soliciting  agents  and  brokers  seldom  possess  the 
requisite  power  for  this.  Even  when  the  policy  prescribes  the 
method  of  assignment  it  Is  not  necessary  to  follow  it  when 
the  insurance  has  been  taken  out  for  the  benefit  of  "assigns" 
or  "for  account  of  whom  it  may  concern"  or  the  Interest  in- 
dicated by  phrases  of  similar  effect.  In  these  cases,  consent 
is  implied  and  the  assignee  acquires  rights  against  the  Insurer. 

Another  method  of  transferring  protection  where  there  is 
no  change  of  title  is  to  have  the  insurer  issue  insurance  cer- 
tificates representing  the  policy.  Here  the  holder  of  the  pol- 
icy gives  certificates  properly  countersigned  by  the  company 
and  made  payable  to  the  party  designated. 

Effect  of  assignment  before  a  loss. — The  effect  of  assign- 
ment depends  upon  the  circumstances  of  the  case,  the  two  most 
important  distinctions  being  when  there  is  a  transfer  of  title 
and  when  there  is  not. 

In  case  of  a  transfer  of  title,  even  where  there  is  a  covenant 
to  Insure  for  the  benefit  of  the  transferee,  the  insurance  does 
not  necessarily  pass,  as  a  policy  ordinarily  expires  with  the 
transfer  of  title  as  far  as  the  transferor  Is  concerned.  But 
where  the  assignment  is  made  and  the  consent  of  the  company 
is  given  it  has  been  held  by  the  courts  that  this  is  the  equiva- 
lent of  a  new  policy.  Therefore,  if  the  title  changes,  any 
prior  violation  of  the  policy  by  the  original  holder  is  waived, 
and  the  only  parties  to  the  contract  are  the  insurer  and  the 
assignee. 

As  opposed  to  this  there  Is  the  assignment  where  no  trans- 
fer of  title  has  taken  place,  i.e.,  where  the  assignee  Is  substi- 
tuted for  the  assignor.     If  the  assignor  has  forfeited  before 


INSURABLE  INTEREST  197 

the  assignment  he  can  assign  nothing.  The  assignee  takes 
the  policy  subject  to  all  prior  set-offs,  even  though  all  the 
policy  provisions  concerning  assignment  have  been  followed 
to  the  letter.  Thus,  a  mortgagor  as  an  assignor  can  present 
only  that  which  he  possesses,  and  in  most  States  prior  for- 
feiture due  to  some  violation  of  the  contract  makes  the  policy 
void,  except  where  a  standard  mortgage  clause  has  been  en- 
dorsed thereon.  This  clause,  as  we  have  seen,  waives  all  the 
prior  acts  of  the  mortgagor. 

Assuming,  then,  that  the  assignment  is  valid  in  all  its  de- 
tails and  no  forfeiture  has  occurred  prior  or  subsequent  to 
the  assignment,  the  assignee  assumes  the  position  of  the  as- 
signor in  his  relation  to  the  insurance  company.  He  is  vested 
with  all  the  rights  of  the  policy-holder  and  can  enforce  these 
rights  against  the  company  in  his  own  name.  Likewise,  the 
company  has  rights  against  him — in  other  words,  a  contrac- 
tual relationship  has  been  established  between  them. 

Effect  of  assignment  after  a  loss. — There  is  nothing  illegal 
in  assigning  the  proceeds  of  a  loss,  as  that  is  the  mere  assign- 
ment of  a  debt  that  is  due  and  is  no  different  from  the  assign- 
ment of  an  "account  receivable"  by  a  mercantile  house.  The 
courts  have  even  decided  that  it  is  against  public  policy  to 
permit  a  company  to  stipulate  in  their  contract  that  they  will 
not  make  payment  to  a  person  so  appointed,  since  it  amounts 
to  a  sale  or  transfer  of  a  chose  in  action,  which  is  always  per- 
mitted in  equity.  However,  it  should  not  be  construed  from 
this  that  if  the  property  has  been  transferred  before  a  loss, 
the  Insurance  can  always  be  transferred  after  a  loss  so  as  to 
give  the  purchaser  rights  thereunder. 

Strictly  construed,  the  policy  provision  previously  referred 
to  would  appear  to  state  that  any  assignment  before  a  loss 
without  consent  relieves  the  company  of  all  liability.  But 
this  depends  upon  the  interpretation  of  the  word  "assignment," 
and  the  courts  have  often  considered  that  certain  cases  of 
transfer  are  not  "assignments"  as  contemplated  by  the  above 
clause.  Only  cases  where  the  assignor  parts  with  all  his 
rights  and  creates  a  privity  between  the  assignee  and  the  in- 
surer are  so  considered.  As  instances  where  the  latter  is  not 
true,  we  have : 

1.  Assignment  for  the  benefit  of  a  creditor. 

2.  Assignment  of  the  amount  secured  by  the  policy. 

3.  Endorsement  making  loss  payable  to  a  third  party. 


198    INSURANCE  PRINCIPLES  AND  PRACTICES 

4.  Deposit  of  policy  as  a  pledge. 

5.  Deposit  of  policy  as  collateral  for  a  chattel  mortgage. 

6.  Assignment  with  a  bill  of  lading  as  collateral  security. 
This  is  not  to  say  that  the  assignee  acquires  the  rights  against 
the  insurer  possessed  by  the  insured,  or  the  rights  which  would 
have  been  obtained  by  an  assignment  with  the  consent  of  the 
Insurer.  These  are  merely  cases  where  the  policy  remains  In 
effect  and  where  the  assignee  has  a  claim  upon  the  proceeds 
of  such  policy  when  paid  to  the  assignor. 


Chapter  XIV 

THE  FIRE  INSURANCE  CONTRACT 

In  this  chapter  we  will  discuss  the  basis  of  fire  insurance, 
that  is,  the  contract  between  the  two  parties;  and  since  all  the 
relations  of  the  parties  are  summed  up  in  this  contract  such 
a  discussion  might  be  extended  until  it  covered  every  phase 
of  the  fire  insurance  business.  Many  of  such  phases,  how- 
ever, we  have  considered  in  other  chapters  and  need  not  refer 
to  here.  This  chapter  is  concerned  mainly  with  the  condi- 
tions of  the  fire  insurance  policy,  the  meaning  of  the  various 
provisions  found  therein  and  the  reasons  for  the  existence  of 
such  provisions.  The  printed  policy  is  often  modified  by  the 
addition  of  endorsements  and  clauses  but  this  subject  must  be 
postponed  to  the  following  chapter. 

Development  of  the  standard  policy. — In  the  early  days  of 
fire  Insurance  every  company  Issued  a  policy  which  suited  its. 
particular  needs.  While  at  first  policies  were  written  largely 
at  the  home  offices  of  the  companies,  the  spread  of  the  insur- 
ance Idea  caused  more  and  more  power  to  be  placed  in  the 
hands  of  the  agents  and,  dealing  with  an  insured  miles  away, 
the  company  ran  the  risk  not  only  of  the  incompetence  of 
agents,  but  dishonesty  of  the  Insured.  The  original  simple 
policy  accordingly  became  hedged  about  by  a  multitude  of 
restrictions,  policies  lacked  uniformity,  and  some  companies 
attempted  to  devise  policies  which  would  impose  as  little  lia- 
bility upon  themselves  as  possible.  As  stated  in  a  court  de- 
cision of  the  period,  the  provisions  were  of  such  bulk  and 
character  that  they  were  not  to  be  understood  by  men  in  gen- 
eral, even  after  laborious  study.  They  were  Intermixed  with 
subjects  In  which  the  premium  payer  had  no  interest,  and  some 
of  the  most  material  parts  were  concealed  In  a  mass  of  rub- 
bish on  the  back  of  the  policy  and  the  following  page,  where 
few  would  think  of  looking.  As  if  It  were  feared  that  some 
one  would,  in  spite  of  these  difficulties,  discover  the  meaning 
of  the  contract,  it  was  printed  in  extremely  small  type  and 
long  crowded  lines  so  that  "the  perusal  of  it  was  made  physi- 
cally difficult,  painful  and  Injurious."     After  a  time  even  the 

199 


200    INSURANCE  PRINCIPLES  AND  PRACTICES 

companies  which  issued  the  policies  did  not  know  their  mean- 
ing because  of  the  conflicting  court  decisions  which  were  ren- 
dered, and  loss  settlements  where  several  policies  were  written 
on  the  same  property  were  almost  impossible.  There  was 
therefore  considerable  agitation  to  establish  a  fixed  form  of 
policy. 

The  first  standard  policy  form  was  adopted  in  Massachu- 
setts In  1873  and  in  New  York  a  standard  form  of  policy 
was  made  the  only  legal  form  in  1887.  Eventually  other 
States  followed  the  example  of  New  York  until  there  were 
about  seventeen  standard  forms  in  use  in  various  States.  Of 
these,  however,  the  New  York  standard  policy  was  the  most 
Important,  having  been  adopted  as  It  stood  by  several  States, 
and  only  slightly  modified  by  others.  The  National  Conven- 
tion of  Insurance  Commissioners  recommended  a  new  stand- 
ard form  in  1914  which  was  adopted  by  three  States,  Including 
Pennsylvania,  and  an  amended  Insurance  Commissioners'  form 
was  adopted  by  New  York^  and  Wisconsin  In  1918.  Many 
provisions  of  the  old  New  York  policy  had  been  nullified  by 
court  decisions  and  some  were  considered  to  be  unfair  to  the 
Insured.  The  advantages  of  a  standard  form  are  :  ( 1 )  Every 
company  Issues  the  same  form  of  contract,  which  is  merely 
modified  by  endorsements  to  meet  the  circumstances  of  the 
case;  (2)  The  Insured  becomes  educated  to  the  meaning  of 
the  contract;  (3)  Law  suits  are  greatly  reduced  in  number; 
(4)  Court  decisions  gradually  fix  the  meaning  of  the  termin- 
ology employed;  (5)  Discrepancies  between  different  poli- 
cies on  the  same  risk  are  reduced  and  loss  settlements  made 
easier. 

Provisions  of  the  New  York  standard  policy. — We  will  use, 
for  Illustration,  the  present  New  York  standard  policy,  with 
which  the  policies  of  many  other  States  are  practically  identi- 
cal. Instead  of  reading  the  policy  from  the  first  line  to  the 
last,  more  satisfactory  results  will  be  attained  by  grouping  the 
policy  provisions  in  their  logical  classifications  and  consider- 
ing them  under  the  following  heads:  (1)  the  parties  to  the 
contract;  (2)  the  premium  and  consideration;  (3)  the  ex- 
tent of  protection  granted;  (4)  the  provisions  governing  the 
Inception  and  termination  of  the  contract;  (5)  the  suspen- 
sion of  the  policy;  (6)  the  voidance  of  the  policy,  and  (7) 
the  provisions  relating  to  the  settlement  of  losses.     This  will 

*  For  New  York  Standard  Policy  see  Appendix  XXX. 


THE  FIRE  INSURANCE  CONTRACT        201 

enable  us   to   consider  together  those   provisions  which   are 
related. 

Parties  to  the  contract. — The  position  of  the  Insured  has 
already  been  described  In  the  chapter  on  "Insurable  Interest," 
and  the  various  types  of  Insurers  In  the  chapter  on  the  "Types 
of  Insurance  Organizations."  The  policy  reads,  "Does  insure 
John  Doe  and  legal  representatives,"  and  the  name  of  the  In- 
sured Is  an  essential  part  of  the  contract.^  He  should  not  be 
named  In  an  indefinite  manner  and  It  Is  not  the  general  practice 
to  Issue  policies  "for  account  of  whom  It  may  concern,"  although 
it  may  be  done  where  a  custodian  undertakes  to  procure  Insurance 
for  his  customers,  as  In  the  case  of  a  warehouse  or  grain  ele- 
vator. In  time  of  war  It  is  essential  to  see  that  the  Insurance 
Is  not  written  for  the  benefit  of  an  enemy,  and  Interest  hidden 
under  the  expressions,  "in  trust,"  "on  consignment,"  etc.,  are 
properly  avoided  by  the  companies.  Because  of  Its  legitimate 
usefulness,  however,  a  "commission  clause"  of  this  type  is  fre- 
quently used.  The  expression — "and  legal  representatives" — 
is  intended  to  cover  a  trustee  or  administrator  appointed  to 
manage  the  affairs  of  an  Insane  or  otherwise  Incompetent 
person.  The  old  New  York  standard  form  did  this  In  a  round- 
about way  by  stating  that  "wherever  In  this  policy  the  word 
Insured  occurs,  it  shall  be  held  to  Include  the  legal  representa- 
tives of  the  insured."  With  reference  to  a  mortgagee,  the 
policy  provides  that  "other  provisions  relating  to  the  Interests 
and  obligations  of  such  mortgagee  may  be  added  hereto  by 
agreement  in  writing,"^  and  we  have  seen  that  such  cases  are 
most  frequently  covered  by  the  addition  of  a  mortgagee  clause. 

The  rate,  premium  and  consideration. — All  contracts  with- 
out seal  require  a  consideration  to  make  them  enforceable, 
and  the  consideration  for  the  fire  Insurance  contract  Is  of  a 
twofold  character,  consisting  (in  the  language  of  the  policy) 
of  "the  stipulations  herein  named  and  of  $  premium."* 

The  promises  of  the  insurance  company  are  conditional  upon 
the  fulfillment  of  the  agreements  of  the  Insured,  and  where 
the  policy  form  is  prescribed  by  the  law  of  the  State  the  in- 
sured may  reasonably  be  expected  to  be  acquainted  with  the 
stipulations  of  the  policy.     Whether  the  acts  or  knowledge  of 

'  See  Appendix  XXX. 

'  Appendix  XXX,  lines  124  and  125. 

'Appendix  XXX. 


202    INSURANCE  PRINCIPLES  AND  PRACTICES 

an  insurance  company  constitutes  a  waiver  of  such  require- 
ments is  another  question  to  be  discussed  elsewhere. 

The  policy  specifies  the  amount  of  insurance,  the  premium 
and  the  rate,  the  latter  being  the  premium  per  $100  of  in- 
surance. The  amount  of  insurance  merely  measures  the  com- 
pany's maximum  liability  and  not  necessarily  its  actual  liabil- 
ity on  any  particular  loss.  The  requirements  made  of  the  in- 
sured are  ( 1 )  that  he  will  truthfully  furnish  certain  facts, 
and  (2)  that  he  will  avoid  certain  acts. 

Extent  of  protection. — 

1.  Events  covered  by  the  policy. — The  policy  insures 
"against  all  direct  loss  or  damage  by  fire  and  by  removal  from 
premises  endangered  by  fire  except  as  herein  provided."^  The 
amount  for  which  the  company  is  liable  can  never  exceed  the 
face  value  of  the  policy  and  may  be  considerably  less,  but  we 
are  here  concerned  not  with  the  amount  of  liability,  but  with 
the  events  which  make  the  policy  payable.  It  is  essential  to 
consider  what  is  meant  by  a  loss  "by  fire."  It  is  not  neces- 
sary that  the  fire  actually  reach  the  property  which  is  de- 
stroyed or  damaged,  but  only  that  fire  shall  have  been  the 
proximate  cause  of  the  loss.  Whether  a  given  event  is  the 
proximate  cause  of  a  fire  Is  primarily  a  question  of  fact,  but 
it  may  be  generally  so  considered  when  there  is  an  unbroken 
connection  between  the  said  event  and  the  loss  without  the 
intervention  of  some  new  and  independent  cause.  Thus,  in 
one  case  an  insurance  company  insured  a  plant  and  its  equip- 
ment, including  electrical  machinery.  A  fire  of  negligible 
size  and  duration  occurred  in  a  waste  basket,  which  was  suf- 
ficient, however,  to  come  in  contact  with  wires  connected  with 
the  machinery,  producing  a  short  circuit  which  severely  strained 
and  wrecked  most  of  the  machinery  in  the  building.  The 
court  held  that  the  fire  was  the  cause  of  the  loss  and,  since 
the  companies  had  not  limited  their  liability  in  this  respect, 
they  were  compelled  to  pay.  Accordingly,  all  the  natural  re- 
sults of  a  fire  are  considered  losses  by  fire,  such  as  the  damage 
caused  by  smoke,  by  water,  by  the  necessary  removal  of  prop- 
erty, and  by  falling  walls  where  fire  was  the  cause.  On  the 
other  hand,  we  must  have  a  hostile  and  not  a  friendly  fire, 
understanding  by  the  latter  one  which  never  leaves  the  place 
intended  for  it.  For  instance,  a  company  will  not  be  held 
liable  for  damage  caused  by  smoke  thrown  off  by  an  oil  heater 

•  See  Appendix  XXX. 


THE  FIRE  INSURANCE  CONTRACT        203 

or  lamp,  nor  for  damage  to  a  stove  which  is  cracked  by  heat, 
nor  for  damage  to  a  wall  which  is  blistered  because  a  stove 
is  placed  too  near  it.  On  the  other  hand,  if  the  stove  falls 
over  and  the  fire  consequently  leaves  the  proper  receptacle, 
a  loss  by  fire  within  the  meaning  of  the  expression  results. 

The  policy  also  covers  loss  or  damage  caused  "by  removal 
from  premises  endangered  by  fire,"  and  this  expression  must 
be  considered  in  connection  with  the  provision  that  such  prop- 
erty is  covered  "pro  rata  for  five  days  at  each  proper  place 
to  which  any  of  the  property  shall  necessarily  be  removed  for 
preservation  from  fire."^  This  is  an  additional  incentive  to 
the  insured  to  protect  the  company  from  unnecessary  loss  by 
saving  and  preserving  goods  which  would  otherwise  become 
damaged.  If  a  policy  for  $14,000  of  insurance  covered  a 
$20,000  stock  of  goods  on  which  a  $5,000  loss  occurred,  and 
$5,000  worth  of  the  remaining  goods  were  removed  to  loca- 
tion "A,"  and  $10,000  worth  to  location  "B,"  5/15  of  the 
remaining  insurance  ($9,000)  or  $3,000,  would  follow  the 
goods  to  location  "A,"  and  10/15  or  $6,000  to  location  "B." 
This  insurance  covers  the  property  for  five  days,  which  is 
considered  a  sufficient  length  of  time  for  the  owners  to  obtain 
a  new  policy  covering  the  new  location. 

It  will  be  noted  that  the  losses  described  above  are  covered 
"except  as  herein  provided,"  and  we  shall  see  that  certain 
articles  are  not  covered,  that  certain  events  make  the  policy 
of  no  effect,  and  that  the  company's  liability  is  as  a  result 
somewhat  modified. 

We  find  that  with  reference  to  insurance  property  may  be 
divided  into  three  groups :  ( 1 )  such  property  as  is  usually 
understood  to  be  covered  without  particular  reference  to  the 
same,  (2)  property  which  is  not  covered  by  the  ordinary  fire 
policy,  and  (3)  property  for  which  liability  must  be  specifi- 
cally assumed  by  endorsement.  Thus,  it  is  stated  that  "this 
policy  shall  not  cover  accounts,  bills,  currency,  deeds,  evidences 
of  debt,  money,  notes  or  securities."^  The  insurance  of  money 
is  considered  undesirable  from  the  standpoint  of  public  policy, 
inasmuch  as  it  would  be  very  difScult  to  prove  the  amount 
destroyed  by  the  fire,  or  to  trace  the  removal  of  money  or  secu- 
rities prior  to  the  fire.  The  value  of  a  deed  to  property  is  prob- 
lematical, for  while  the  instrument  is  a  matter  of  public  record 

'  See  Appendix  XXX. 

'  Appendix  XXX,  lines  7,  8,  9. 


204    INSURANCE  PRINCIPLES  AND  PRACTICES 

it  has  some  value  in  itself.  Evidences  of  debt,  such  as  prom- 
issory notes,  are  of  uncertain  value,  depending  upon  the  credit 
of  the  promisor.  Turning  to  the  property  for  which  liability 
must  be  assumed  by  specific  endorsement,  the  above  quotation 
from  the  policy  continues:  "nor,  unless  specifically  named 
hereon  in  writing,  bullion,  manuscripts,  mechanical  drawings, 
dies  or  patterns."^  These  are  in  the  main  articles  which  may 
be  of  much  or  little  value,  depending  upon  circumstances.  The 
value  of  a  mechanical  drawing,  for  example,  may  be  highly 
doubtful,  there  being  no  practical  method  of  determining  its 
market  value,  while  a  pattern  is  valuable  only  if  the  article 
produced  from  it  is  salable  and  has  value.  These  exceptions 
enable  the  insurance  company  to  make  specific  arrangements 
for  the  insurance  of  articles  of  this  type.  They  are  often  in- 
sured under  a  "valued"  policy  in  which  the  value  is  agreed  upon 
at  the  time  of  issuing  the  policy.  Valued  policies  are,  in  gen- 
eral, undesirable. 

We  find  that  the  company  also  exempts  itself  from  liability 
for  loss  caused  by  certain  excepted  hazards,  including 
"invasion,  insurrection,  riot,  civil  war  or  commotion,  or  mil- 
itary or  usurped  power  or  by  order  of  any  civil  authority  or 
by  theft;  or  by  neglect  of  the  insured  to  use  all  reasonable 
means  to  save  and  preserve  the  property  at  and  after  a  fire  or 
when  the  property  is  endangered  by  fire  in  neighboring  prem- 
ises."^    These  are  very  important  exceptions. 

For  losses  due  to  invasion,  insurrection,  riot,  civil  war  or 
commotion  or  military  or  usurped  power  the  company  is  not 
liable,  because  such  losses  occur  under  circumstances  not  con- 
templated at  the  time  the  policy  is  issued  and  where  a  loss 
can  hardly  be  prevented  or  reduced.  Furthermore,  in  many 
cases' the  insured  party  has  the  right  of  redress  against  the 
municipality  or  State.  The  exemption  from  loss  caused  "by 
order  of  any  civil  authority"  has  a  very  definite  reason.  It 
frequently  happens  that  in  large  conflagrations  property  is 
purposely  and  legally  destroyed  to  save  considerably  more 
property.  In  California  such  a  loss  is  not  considered  as  cov- 
ered by  the  policy,  but  in  most  other  States  it  is  held  to  be  a 
loss  by  fire  and  not  "by  order  of  any  civil  authority."  Losses 
by  theft  are   specifically  excluded   from   coverage,^"  inasmuch 


'Appendix  XXX,  lines  9-11. 
•Appendix  XXX,  lines  14-19. 
"  Appendix  XXX,  line  16. 


THE  FIRE  INSURANCE  CONTRACT        205 

as  the  Insured  might  be  expected  to  take  means  to  prevent 
such  losses  and  because,  under  the  laws  of  some  States,  a  fire 
insurance  company  cannot  cover  this  risk.  Separate  insurance, 
however,  may  now  be  obtained  against  insurrection,  riot,  and 
civil  commotion,"  also  protection  against  damage  to  property 
caused  by  striking  workmen.  The  remaining  portion  of  this 
provision,  stating  that  failure  of  the  insured  to  use  his  efforts 
in  behalf  of  the  insurance  company  will  result  in  a  denial  of 
liability  under  the  policy,  is  a  penalty  intended  to  reinforce  the 
provision  requiring  the  insured  to  preserve  all  the  property 
possible. 

The  policy  further  provides  "this  company  shall  not  be  lia- 
ble for  loss  or  damage  occurring  by.  explosion  or  lightning 
unless  fire  ensue  and,  in  that  event,  for  loss  or  damage  by  fire 
only."^^  Thus,  the  insurer  is  liable  only  for  the  loss  caused  by 
a  fire  following  the  explosion.  As  an  illustration  where  no 
liability  exists  we  might  take  the  case  of  a  steam  boiler  which, 
as  the  result  of  the  application  of  heat  in  the  ordinary  way, 
explodes.  For  this  the  company  has  no  liability  unless  the 
explosion  is  followed  by  fire.  Where  the  fire  precedes  the  ex- 
plosion and  the  explosion  Is  a  direct  result  of  the  fire,  the  fire 
and  explosion  being  in  the  same  premises,  the  company  is  liable 
for  the  entire  loss.  * 

2.  Amounts  covered  by  the  policy. — The  contract  makes  the 

company  liable  "to  an  amount  not  exceeding  $ ."     This 

must  be  construed  only  as  the  maximum  amount  for  which  the 
company  can  be  held  liable,  its  actual  liability  in  particular 
cases  often  being  much  less,  even  where  total  destruction  results 
from  the  fire.  This  Is  explained  by  the  clause  following:  "does 
Insure  to  the  extent  of  the  actual  cash  value  (ascertained  with 
proper  deductions  for  depreciation)  of  the  property  at  the  time 
of  loss  or  damage. "^^ 

Nothing  could  be  clearer  In  theory  than  the  expression 
"actual  cash  value,"  but  few  things  are  more  dificult  to  de- 
termine In  practice.  The  circumstances  of  every  case  make  It 
seem  a  special  problem  to  which  no  general  rule  is  applicable. 
It  Is  evident  that  the  meaning  of  the  contract  is  not  affected 
by  the  amount  of  Insurance  on  the  property  or  the  value  of  the 
property  at  the  time  the  policy  was  Issued,  but  depends  upon 


Appendix  LVII. 

Appendix  XXX,  lines  59-61. 

Appendix  XXX. 


206    INSURANCE  PRINCIPLES  AND  PRACTICES 

the  actual  loss  suffered  by  the  uisured.  To  allow  the  insured 
to  recover  the  original  value  of  real  estate  which  has  depre- 
ciated, of  machinery  which  has  been  subject  to  wear  and  tear, 
of  goods  which  have  lost  a  large  proportion  of  their  value 
because  of  changing  styles,  of  articles  which  have  become  al- 
most worthless,  would  be  an  injustice  to  other  policy-holders, 
to  the  company  and  to  the  public.  It  would  simply  furnish  an 
incentive  for  the  destruction  of  property,  because  more  could 
be  recovered  as  insurance  than  the  property  is  worth  while  in 
existence.  Even  under  present  conditions  it  is  found  that  busi- 
ness depressions,  which  reduce  the  values  of  buildings  and 
stocks  of  goods,  cause  large  increases  in  the  fire  losses.  Such 
conditions  furnish  an  Incentive  for  a  fire. 

In  spite  of  the  theory  explained  above  some  States  have 
seen  fit  to  pass  "valued  policy  laws."  A  valued  policy  is  one 
where  the  value  of  the  property  insured  Is  agreed  upon  when 
the  contract  is  made  and  not  when  the  loss  occurs — such  con- 
tracts being  common  in  marine  insurance,  but  used  in  fire  insur- 
ance only  for  covering  bullion,  manuscripts,  drawings,  etc., 
whose  value  Is  difficult  to  determine  at  any  time.  The  State 
laws  referred  to  make  every  policy  a  valued  policy,  so  that  if 
a  property  Is  totally  destroyed  the  insured  Is  entitled  to  claim 
from  the  company  the  full  amount  of  Insurance  regardless  of 
the  value  of  the  property  at  the  time  of  the  loss.  Thus,  for 
the  destruction  of  a  building  insured  for  $10,000  the  Insured 
would  be  entitled  to  claim  $10,000  although  the  building  might 
have  depreciated  to  a  value  of  only  $6,000.  Such  laws  have 
a  tendency  to  increase  fires. 

The  actual  cash  value  of  property  Is  the  material  value  of 
such  property  and  not  the  subjective  value  which  a  particular 
person  may  place  upon  a  piece  of  property  because  of  affection 
or  sentiment.  Scarcity  may,  of  course,  give  an  object  market 
value,  as  in  the  case  of  a  postage  stamp  which  is  desired  by 
collectors,  but  a  high  personal  valuation  is  not  sufficient.  The 
actual  cash  value  is  furthermore  dependent  upon  the  stage  of 
ownership  which  the  property  has  reached  in  its  transfer  from 
manufacturer  to  consumer  at  the  time  of  the  loss.  In  a  book- 
let Issued  by  one  company  this  is  very  appropriately  illustrated 
by  the  case  of  an  automobile.  In  a  factory  warehouse  it  Is 
valued  at  the  cost  of  production  exclusive  of  profit,  because 
the  ordinary  Insurance  contract  does  not  cover  profit.  In 
the  dealer's  store  the  cost  of  production  of  the  automobile  has 


THE  FIRE  INSURANCE  CONTRACT        207 

been  increased  by  the  addition  of  the  manufacturer's  profit 
(which  is  cost  to  the  dealer)  and  freight  charges.  When  the 
automobile  reaches  the  final  purchaser  the  value  has  been 
further  increased  by  the  dealer's  profit  and  then  takes  a  sud- 
den drop  with  the  first  day's  use,  and  the  question  of  actual 
cash  value  becomes  again  an  open  one.  We  have  spoken 
above  of  the  cost  of  production  but  this  is  not  easy  to  deter- 
mine, because  each  article  must  be  charged  not  only  with  the 
cost  of  the  raw  material  from  which  it  was  made  but  with 
a  proportion  of  the  trading  expenses  and  administration  ex- 
penses of  the  business.  In  fixing  the  cash  value  allowance 
must  be  made  for  the  depreciation  in  value  of  property  which 
is  not  new.^*  It  is  exceedingly  difiicult  to  estimate  the  amount 
of  depreciation  in  real  estate  and  other  things  offer  even 
greater  difficulties.  Cash  value  really  means  the  cost  of  replac- 
ing an  object  with  new  property  at  the  time  of  the  loss,  less 
depreciation. 

"But  not  exceeding  the  amount  which  it  would  cost  to  repair 
or  replace  the  same  with  material  of  like  kind  and  quality."^^ 
This  is  connected  with  the  subject  of  depreciation.  Let  us 
suppose  that  an  article  was  originally  worth  $10,000  and  by 
reason  of  five  years'  use  had  depreciated  $4,000  in  value. 
Ordinarily  we  would  consider  the  company's  liability  in  case 
of  destruction  as  $6,000,  but  if  by  reason  of  inventions  and 
improved  methods  the  article  in  question  could  now  be  pro- 
duced for  $5,000,  this  would,  under  the  phrase  quoted  above, 
be  the  limit  of  liability.  From  this  a  deduction  for  deprecia- 
tion would  have  to  be  made.  Inasmuch  as  the  company  Is  not 
required  to  furnish  the  insured  with  a  new  article  in  place  of 
the  one  destroyed. 

This  implies  that  the  company  has  the  privilege  of  repairing 
or  replacing  the  property  instead  of  paying  the  loss,  which  Is 
true,  since  the  policy  contains  a  provision  permitting  it  "to  take 
all  or  any  part  of  the  articles  at  the  agreed  or  appraised  value 
and  also  to  repair,  rebuild  or  replace  the  property  lost  or  dam- 
aged with  other  of  like  kind  and  quality  within  a  reasonable 
time  on  giving  notice  of  Its  intention  so  to  do  within  thirty  days 
after  receipt  of  the  proof  of  loss  herein  required."^®  We  have 
given  an  Illustration  above  where  It  would  be  more  profitable 

"  See  Appendix  XXX. 
"See  Appendix  XXX. 
"Appendix  XXX,  lines  176-182, 


208    INSURANCE  PRINCIPLES  AND  PRACTICES 

for  the  insurance  company  to  replace  the  article  than  to  pay  the 
original  cost  less  depreciation  and  this  clause  gives  it  the  right 
to  so  do.  Let  us  Imagine,  however,  an  article  originally  worth 
$1,000  which  has  appreciated  in  value  so  that  it  is  worth  at 
the  time  it  is  damaged  $1,200,  in  spite  of  the  wear  and  tear 
which  it  has  endured.  The  fire  damage,  we  will  assume,  is  20 
per  cent,  or  $240.  If  the  company  takes  the  damaged  article 
and  replaces  it  with  a  new  one  its  net  loss  will  be  $240.  If  it 
calculates  and  pays  the  amount  of  the  damage  its  net  loss  will  be 
the  same.  If,  however,  by  repairs  costing  $100  the  article 
could  be  put  in  as  good  condition  as  before  the  fire,  this  would 
obviously  be  the  economical  course  to  pursue  and  the  insured 
would  not  be  injured  in  any  way.  This  provision  is  valuable  to 
the  company  mainly  because  the  cost  of  materials  and  labor 
varies  from  time  to  time.  The  provision  requiring  this  to  be 
done  within  a  reasonable  time  protects  the  insured  against  the 
loss  of  the  use  of  his  property  in  case  such  repairs  cannot  be 
promptly  executed.  These  options  afford  the  company  a  fair 
method  of  resisting  excessive  claims  made  by  the  insured,  al- 
though such  options  are  not  ordinarily  used  since  ( 1 )  the 
courts  generally  hold  the  companies  strictly  accountable  for 
supplying  materials  of  like  kind  and  quality  and  (2)  the  exer- 
cise of  the  options  compels  the  company  to  go  Into  the  business 
of  buying  materials,  repairing  articles  and  restoring  buildings. 
The  trouble  and  difficulties  Involved  In  this  work  have  led  to 
the  formation  of  salvage  companies  who  can  be  employed  to 
manage  such  matters.  In  order  to  exercise  the  privileges  re- 
ferred to  above  the  company  must  give  notice  of  Its  intention 
within  thirty  days  after  the  receipt  of  the  proof  of  loss,  and 
having  once  given  such  notice  it  is  bound  by  It.  It  should  be 
noted  that  In  fire  Insurance,  unlike  marine  insurance,  the  Insured 
does  not  possess  the  privilege  of  surrendering  to  the  company 
what  is  left  of  the  property  and  claiming  the  face  value  of  the 
policy,  since  the  policy  states  "there  can  be  no  abandonment  to 
this  company  of  any  property."^'^ 

The  contract  provides  that  the  loss  shall  be  settled  "without 
any  allowance  for  any  increased  cost  of  repair  or  reconstruc- 
tion by  reason  of  any  ordinance  or  law  regulating  construction 
or  repair."^^  Many  cities  have  enacted  ordinances  Intended  to 
prevent  the  further  use  of  features  of  building  construction 

"Appendix  XXX,  lines  183-184. 
"Appendix  XXX. 


THE  FIRE  INSURANCE  CONTRACT        209 

which  contribute  to  fire  hazard.  Shingle  roofs  might  be  taken 
as  a  good  example.  In  the  event  of  the  destruction  of  the  roof 
it  may  be  necessary  by  reason  of  the  law  to  replace  it  with 
a  roof  costing  considerably  more  and  this  is  a  loss  for  which 
the  company  is  not  liable.  In  places  where  such  laws  are 
strictly  enforced  the  companies  assume  the  responsibility  by 
endorsement,  charging  an  additional  premium  therefor. 

The  insurance  company,  as  we  have  previously  seen,  as- 
sums  liability  for  direct  loss  by  fire  but  not  for  consequential 
losses.  The  policy  states  that  the  loss  will  be  settled  "without 
compensation  for  loss  resulting  from  interruption  of  business 
or  manufacture."^^  The  insured  can  recover  the  cash  value 
of  the  property  destroyed,  but  if  It  is  some  time  before  the 
property  is  again  in  his  possession  in  its  former  condition  and 
he  thereby  loses  money  through  inability  to  operate,  through 
the  loss  of  contracts  or  the  deprivation  of  profits  which  he 
might  otherwise  have  made,  the  insurer  Is  not  liable  for  these 
latter  losses.  Such  losses  may  be  protected  against  by  obtain- 
ing use  and  occupancy  insurance,  business  Interruption  indem- 
nity, rent  Insurance  or  profits  insurance,""  but  are  not  covered 
by  the  usual  fire  insurance  policy.  Such  Insurance  may  be 
provided  for  by  endorsements  on  the  fire  policy  and  will  be 
referred  to  In  the  next  chapter. 

Finally,  in  connection  with  the  amount  for  which  the  com- 
pany Is  liable  in  the  event  of  loss,  we  must  consider  the  case 
where  the  same  property  is  Insured  in  several  companies,  as 
is  frequently  done  with  large  risks.  Suppose,  for  example,  a 
property  worth  $400,000  which  is  Insured  In  company  "A" 
for  $300,000  and  in  company  "B"  for  $100,000.  The  poli- 
cies of  both  companies  provide  that  "This  company  shall  not 
be  liable  for  a  greater  proportion  of  any  loss  or  damage  than 
the  amount  hereby  Insured  shall  bear  to  the  whole  Insurance 
covering  the  property,  whether  valid  or  not  and  whether  col- 
lectible or  not."^^  In  our  illustration,  company  "A"  Is  liable 
for  three-quarters  of  any  loss  and  company  "B"  for  one-quarter 
of  any  loss.  According  to  the  last  phrase  of  the  provision,  If 
company  "A"  should  become  Insolvent  and  able  to  pay  only 
50  cents  on  the  dollar,  company  "B"  cannot  be  relied  upon  to 
make  up  the  balance  and  the  insured  will  consequently  receive 

"  Appendix  XXX. 
**  See  Appendix  XL. 
"Appendix  XXX,  lines  101-105. 


210    INSURANCE  PRINCIPLES  AND  PRACTICES 

only  three-eighths  of  the  loss  from  company  "A"  and  one- 
quarter  of  the  loss  from  company  "B,"  losing  the  remaining 
three-eighths  of  the  damage  because  he  selected  a  weak  com- 
pany. Were  it  otherwise,  the  property  owner  would  take  a 
small  amount  of  insurance  in  a  strong  company  and  the  balance 
of  the  value  he  would  insure  with  weaker  companies  at  lower 
rates,  depending  nevertheless  upon  the  strong  company  to  pay 
any  sums  which  the  weaker  companies  might  be  unable  to  pay. 

Inception  and  termination  of  the  contract. — The   policy 

states  that  the  company  "does  insure  for  the  term  of 

....  from  the day  of 19.. 

at  noon,  to  the day  of 19.. 

at  noon."  The  usual  periods  of  time  are  one,  three  and  five 
years.  The  word  "noon"  is  defined  by  the  policy  as  noon  of 
standard  time  at  the  place  of  loss  or  damage,'^  although 
standing  alone  it  was  formerly  given  various  interpretations 
by  the  courts.  By  agreement  the  date  of  termination  of  the 
contract  might  be  left  open;  in  one  decision  the  court  said  that 
a  standard  policy  with  date  of  termination  left  blank  would 
be  considered  as  binding  for  at  least  a  reasonable  time. 

From  the  standpoint  of  the  insured  the  vital  element  Is  the 
determination  of  the  moment  when  the  contract  with  the  com- 
pany takes  effect,  that  Is  to  say,  when  the  insurance  begins. 
The  acceptance  of  the  risk  by  the  company  Is  the  act  which 
determines  this  and  delivery  of  the  policy,  while  excellent  evi- 
dence of  this  fact,  is  not  essential.  A  general  agent  frequently 
binds  the  company  by  the  statement  that  the  policy  will  be 
Issued  and  many  cases  have  arisen  where  the  mailing  of  a 
policy  was  considered  acceptance  of  the  risk,  because  the  post- 
office  Is  considered  the  agent  of  the  Insured  and  acceptance 
Indicated  to  it  Is  acceptance  Indicated  to  him.  To  avoid  this 
question  a  representative  of  the  company  Issues  to  the  Insured 
a  "binder,"  which  Is  written  evidence  of  the  acceptance  of  the 
risk.  This  specifies  that  the  Insurance  Is  binding  from  a  definite 
date,  gives  a  brief  description  of  the  property,  stating  that  the 
"binder"  terminates  upon  delivery  of  the  policy  or  upon  a 
date  named  therein,  and  provides  for  the  adjustment  of  any 
loss  In  accordance  with  the  provisions  stipulated  In  the  stand- 
ard policy." 

The  former  New  York  standard  policy  contained  a  provision 


**  Appendix  XXX,  lines  106-107. 
"Appendix  XLI. 


THE  FIRE  INSURANCE  CONTRACT        211 

that  the  contract  might  be  continued  by  renewal,  but  without 
such  provision  the  parties  may,  of  course,  by  agreement  con- 
tinue their  relations.  Such  a  renewal  may  be  effected  by  a 
renewal  agreement,  by  the  issuance  of  a  new  policy,  or  by  a 
renewal  receipt.^*  The  renewal  receipt  is  merely  a  statement 
in  writing  of  the  intention  of  the  parties  to  renew  the  contract. 
Where  changes  of  amount,  location  or  hazard  have  taken  place, 
a  renewal  receipt  Is  inadvisable  and  a  new  policy  should 
be  issued.  A  renewal  creates  a  new  contract  on  the  same 
term.s  as  the  old  one,  so  that  if  the  insured  has  violated  the 
old  policy  so  as  to  make  it  void,  the  renewal  creates  a  new 
contract  which  Is  not  affected  by  acts  during  the  term  of  the 
old  contract.  Likewise,  the  insured  need  not  expect  that  the 
unwritten  privileges  which  he  enjoyed  under  the  old  policy  are 
to  be  continued  under  the  renewal  unless  endorsed  on  the 
policy.  In  one  case,  however,  the  court  held  that  the  Insured 
was  entitled  to  presume  that  the  new  contract  was  similar  to 
the  old  one,  even  though  he  failed  to  read  the  new  policy.  The 
description  which  the  Insured  gives  must  apply  to  the  property 
as  It  is  at  the  time  of  renewal  and  he  must  also  disclose  to 
the  company  any  changes  in  hazard  which  have  taken  place. 

A  policy  may  be  terminated  In  three  ways :  ( 1 )  by  expira- 
tion of  the  term  without  renewal,  (2)  by  cancellation  and  (3) 
by  the  occurrence  of  some  event  named  in  the  policy.  The  first 
requires  no  discussion.  As  regards  cancellation,  the  policy  pro- 
vides that  "This  policy  shall  be  cancelled  at  any  time  at  the 
request  of  the  Insured,  In  which  case  the  company  shall,  upon 
demand  and  surrender  of  this  policy,  refund  the  excess  of  paid 
premium  above  the  customary  short  rates  for  the  expired 
tlme.^^  The  short  rate,  which  is  greater  than  the  pro  rata 
premium  (see  pp.  236,  424),  Is  justified  by  the  expense  which 
the  company  Incurred  in  writing  the  policy.  Either  the 
Insured  or  the  company  may  terminate  the  contract  by  cancel- 
lation. While  no  obligations  are  Imposed  on  the  Insured,  how- 
ever, the  company  must  do  two  things :  ( 1 )  give  five  days' 
notice  of  Its  Intention  In  writing,  and  (2)  tender,  or  offer  to 
tender,  the  unearned  premium.  The  notice  given  by  the  com- 
pany is  intended  to  enable  the  Insured  to  obtain  new  insurance 
on  his  property  If  desired.  To  a  mortgagee,  ten  days'  notice 
is  necessary. 

"  Appendix  XLIII. 
"Appendix  XXX,  lines  89-100. 


212    INSURANCE  PRINCIPLES  AND  PRACTICES 

As  previously  worded,  the  requirement  that  "the  unearned 
premium  shall  be  returned  on  surrender  of  this  policy"  was 
construed  by  the  courts  to  mean  that  the  unearned  premium 
must  be  tendered  at  the  time  of  cancellation  in  order  that  an 
attempted  cancellation  might  be  effective.  But  it  is  frequently 
difficult  for  the  company  to  reach  the  insured  with  a  notice 
of  cancellation,  and  a  dishonest  person  may  purposely  avoid 
the  service  of  the  cancellation  notice  and  the  tender  of  the 
unearned  premium.  A  notice  that  "the  pro  rata  unearned 
premium,  if  the  premium  has  actually  been  paid,  is  held  sub- 
ject to  your  order  on  surrender  of  said  policy,"  would  be  in- 
effective under  the  old  standard  policy  according  to  court  de- 
cisions. It  is  provided  by  the  new  form,  therefore,  that  the 
company  may  cancel  without  tender  of  the  unearned  premium, 
provided  that  said  unearned  premium  be  refunded  upon  demand 
to  the  insured  and  the  insured  notified  that  such  will  be  done 
in  order  that  he  may  be  aware  of  his  rights.  In  case  of  can- 
cellation by  the  company  the  insured  Is  entitled  to  a  return  of 
the  pro  rata  portion  of  the  premium  for  the  unexpired  time, 
so  that  If  a  one-year  policy  Is  cancelled  at  the  end  of  six  months 
he  is  entitled  to  a  return  of  one-half  of  the  premium.  In  case 
the  Insured  desires  to  cancel  the  policy  the  company  returns 
only  the  difference  between  the  premium  paid  and  the  "short 
rate"  customarily  charged.  A  "short  rate"  is  a  rate  charged 
for  insurance  of  less  than  one  year,  and  is  justified  for  such 
Insurance  because  of  the  higher  relative  expense  Involved.  It 
costs  nearly  as  much  to  write  insurance  for  one  month  as  for 
one  year,  and  therefore  when  the  insured  cancels  at  the  end  of 
six  months  he  cannot  expect  to  receive  one-half  of  the  pre- 
mium. For  example,  the  premium  for  one  month,  according 
to  the  short  rate  table  used  by  the  company,  might  be  20  per 
cent  of  the  annual  rate.  Under  any  other  arrangement,  per- 
sons would  always  take  one-year  policies  and  cancel  them  when 
necessary,  thus  causing  additional  clerical  work.  A  sample 
"short  rate"  table  Is  given  in  the  appendices.^*^ 

The  policy  also  provides  that  "If  loss  or  damage  is  made 
payable  In  whole  or  in  part  to  a  mortgagee  not  named  herein 
as  the  insured,  this  policy  may  be  cancelled  as  to  such  interest 
by  giving  to  such  mortgagee  a  ten  days'  written  notice  of  can- 
cellation.""    This  applies  to  a  policy  taken  by  the  owner  and 

"Appendix  XLIV. 

"Appendix  XXX,  lines  108-112. 


THE  FIRE  INSURANCE  CONTRACT        213 

made  payable  to  a  mortgagee  who  has  lent  money  on  the 
property. 

While  neither  the  insured  nor  the  company  is  required  to 
give  reasons  for  cancellation,  the  principal  reasons  for  cancel- 
lation by  the  company  are  increase  of  hazard,  bad  physical 
or  moral  hazard,  unsatisfactory  loss  ratio,  over-Insurance  and 
non-payment  of  premiums. 

There  are  many  provisions  in  the  policy  as  to  acts  which 
render  it  temporarily  or  permanently  void,  all  of  which  are 
discussed  later  in  this  chapter;  but  in  contrast  with  the  void- 
ing of  the  policy,  one  provision  states  that  the  insurance  shall 
"cease  if  a  building  or  any  material  part  thereof  fall  except 
as  the  result  of  fire.""^  All  insurance  on  such  building  or  its 
contents  thereupon  ceases  because  after  the  building  has  fallen 
the  risk  has  materially  changed.  While  this  provision  has  been 
enforced  by  the  courts,  it  has  always  been  strictly  construed 
against  the  companies,  who  were  usually  compelled  to  prove 
that  a  material  part  of  the  building  had  fallen.  The  intro- 
duction of  the  word  "material"  now  makes  this  a  part  of  the 
contract. 

Suspension  and  voidance  of  the  policy. — Suspension. — 
Since  the  insurance  company  accepts  a  risk  and  names  a  pre- 
mium on  the  basis  of  the  hazard  existing  at  the  time  the  risk 
is  offered,  many  provisions  are  inserted  which  are  designed  to 
prevent  the  increase  of  such  hazard  without  the  knowledge  of 
the  company.  In  the  original  New  York  standard  form  the 
companies  attempted  to  prevent  this  increase  of  hazard  by 
providing  that  the  poHcy  was  void  when  one  of  the  above-men- 
tioned provisions  was  violated.  The  question  then  arose 
as  to  whether  the  policy  again  became  valid  when  the  violation 
ceased.  If  the  policy  became  void,  for  example,  when  gasoline 
was  stored  on  certain  premises,  did  the  policy  again  become 
valid  when  the  gasoline  was  removed?  The  companies  an- 
swered this  question  in  the  negative  but  the  courts  were  favor- 
able to  the  insured,  and  in  many  States  the  policy  was  revived 
when  the  violation  ceased.  Accordingly,  the  new  policy  form 
merely  suspends  the  policy  while  such  violations  continue.'^ 
The  various  acts  considered  to  increase  the  hazard  will  now 
be  considered. 

The    policy    provides    that    "the    Company    shall    not    be 


'*  Appendix  XXX,  lines  68-71. 
"Appendix  XXX,  lines  32-35 


214    INSURANCE  PRINCIPLES  AND  PRACTICES 

liable  for  loss  or  damage  occurring  while  the   insured  shall 
have  any  other  contract  of  insurance  whether  valid  or  not  on 
property  covered  in  whole  or  in  part  by  this  policy."^"     Con- 
sent for  other  insurance  may  be  obtained  from  the  company, 
of  course,  and  an  endorsement  made  on  the  policy.     Such  con- 
sent is  obtained  without  any  extra  charge  except  in  cases  where 
there  is  a  specific  object  in  restricting  the  amount  of  insurance. 
Thus,  it  is  sometimes  the  object  not  to  insure  the  full  value 
of  the  property  in   order  to   compel  the   insured  to  exercise 
greater    care.      Likewise,    the    amount    of   insurance    may    be 
limited  with  the  object  of  decreasing  any  moral  hazard  that 
may  exist.     It  will  be  noted  that  this  prohibition  only  refers 
to  other  contracts  of  insurance  taken  out  by  the  insured  and 
its  object  is  not  to  prevent  several  different  Interests  in  the 
same  property  from  being  Insured,  but  to  prevent  the  same 
interest  from   securing  several   different  policies  without  the 
knowledge   of  the   companies.      The  courts   have  upheld  this 
clause  as  it  would  otherwise  be  easy  for  a  person  to  over-Insure 
his  property  and  thus  create  an  incentive  for  Its  destruction. 
In  regard  to  the  policy  provision  of  the  former  standard  policy, 
three  lines  of  court  decisions  exist.     One  held  that  where  two 
policies  existed  without  consent  the  later  policy  was  void  from 
its  Inception  because  of  the  prohibition  and  since  the  second 
policy  never  really  existed,  the  first  policy  was  valid.     Another 
view  was  that  the  subsequent  policy  invalidated  the  first  policy 
and  might  or  might  not  itself  be  valid,  while  a  third  view  gave 
the  Insured  the  benefit  of  one  policy,  but  not  of  both;  I.e.,  if 
the  company  recognized  the  subsequent  policy,   the  first  was 
invalid,   and   if   the   second   Company  repudiated   the   second 
policy,  the  first  was  valid. 

It  will  be  noticed  that  this  prohibition  refers  to  a  property 
"covered  in  whole  or  in  part  by  this  policy,""^  an  expression 
which  brings  up  the  doctrine  of  "entirety  of  the  contract." 
This  is  important  not  only  in  connection  with  this  subject  of 
suspension  but  with  many  others.  It  would  seem  that  the 
intention  of  the  company  is  that  when  the  policy  Is  violated  as 
regards  a  part  of  the  property,  the  entire  policy  on  all  the 
property  is  suspended.  In  other  words  the  policy  is  regarded 
as  a  unit  and  indivisible.  The  court  decisions  of  the  past  show 
a  tendency,  however,  to  be  lenient  toward  the  insured  and  the 

^Appendix  XXX,  lines  35-37. 
"  Appendix  XXX,  line  37. 


THE  FIRE  INSURANCE  CONTRACT        215 

policy  has  sometimes  been  considered  as  divisible  and  some- 
times as  Indivisible.  One  court  held  that  when  the  company 
acknowledged  Its  liability  upon  one  building  covered  by  a 
policy,  It  acknowledged  liability  upon  all  of  them,  although 
the  provision  against  vacancy  had  been  violated  in  regard  to 
part  of  the  property.  But  in  another  case,  where  the  policy 
covered  sixteen  tenement  houses,  the  court  held  the  policy  to 
be  valid  in  the  case  of  one  building  which  was  burned,  although 
at  the  time  eight  of  the  houses  were  vacant  contrary  to  the 
policy  provision.  The  tendency  has  been  to  give  some  con- 
sideration to  the  character  of  the  subject  matter  insured.  The 
policy  should  undoubtedly  be  strictly  construed  where  it  cov- 
ers a  building  and  its  contents,  whereas  a  policy  covering  sev- 
eral buildings  some  distance  apart  might  be  considered  divis- 
ible on  the  ground  that  in  the  former  case  both  items  of  prop- 
erty are  closely  related  while  in  the  latter  they  are  separate 
entities. 

The  Company  shall  not  be  liable  for  loss  or  damage  occur- 
ring "while  mechanics  are  employed  in  building,  altering,  or  re- 
pairing the  described  premises  beyond  a  period  of  fifteen 
days."^^  It  is  plain  that  the  object  of  tnis  clause  is  to  permit 
the  insured  to  make  such  alterations  and  repairs  as  are  nec- 
essary for  the  up-keep  of  the  property,  but  not  to  cover  a 
building  while  it  Is  being  extensively  remodeled.  This  latter 
is  a  risk  which  was  not  contemplated  at  the  time  when  the 
policy  was  issued  and  therefore  special  permission  in  writing 
must  be  obtained. 

Certain  dangerous  processes  and  articles  are  also  prohibited. 
The  company  is  not  liable  "while  illuminating  gas  or  vapor  is 
generated  on  the  described  premises;  or  while  (any  usage  or 
custom  to  the  contrary  notwithstanding)  there  is  kept,  used  or 
allowed  on  the  described  premises  fireworks,  greek  fire,  phos- 
phorus, explosives,  benzine,  gasoline,  naphtha,  or  any  other 
petroleum  product  of  greater  inflammability  than  kerosene  oil, 
gunpowder  exceeding  twenty-five  pounds,  or  kerosene  oil  ex- 
ceeding five  barrels. "^^  The  list  in  the  former  standard  policy 
included  in  addition  benzol,  dynamite,  ether,  nitro-glycerlne; 
and  in  regard  to  kerosene  oil,  it  was  required  that  it  be  drawn 
and  that  lamps  be  filled  by  daylight,  or  at  a  distance  not  less 
than  ten  feet  from  artificial  light.     Benzol,  dynamite,  naphtha 

"Appendix  XXX,  lines  41-43. 
"Appendix  XXX,  lines  44-51. 


216    INSURANCE  PRINCIPLES  AND  PRACTICES 

and  nltro-glycerlne,  however,  are  also  included  within  the 
meaning  if  not  the  words  of  the  new  clause,  while  ether  and 
kerosene  oil  have  become  relatively  little  used  in  the  ordinary 
dwelling  or  business  house.  The  provision  regarding  the  fill- 
ing of  lamps  was  never  enforceable.  It  should  be  noted  that 
nearly  every  court  has  held  that  where  the  use  of  any  pro- 
hibited article  is  usual  and  necessary  in  the  conduct  of  the  busi- 
ness of  the  insured  or  is  kept  in  similar  establishments  it  does 
not  void  the  policy,  although  there  are  some  decisions  to  the 
contrary.  In  many  cases  the  provision  "any  custom  of  trade 
or  manufacture  to  the  contrary  notwithstanding,"  has  been  held 
to  be  in  restraint  of  trade  and  contrary  to  public  policy. 

In  regard  to  manufacturing  establishments,  the  company  is 
not  liable  "while  operated  in  whole  or  in  part  between  the 
hours  of  10:00  P.  M.  and  5:00  A.  M.  or  while  it  ceases  to 
be  operated  beyond  a  period  of  ten  days."^*  In  the  great  ma- 
jority of  cases  overtime  operation  increases  the  hazard,  while 
the  latter  portion  of  the  phrase  is  intended  to  cover  two  cases — 
( 1 )  where  a  strike  occurs,  with  consequent  additional  danger 
to  the  premises  and  (2)  where  business  is  poor  and  the  prop- 
erty consequently  becomes  worthless  in  the  owner's  estima- 
tion, thus  increasing  the  moral  hazard. 

The  company  is  not  liable  "while  a  described  building, 
whether  intended  for  occupancy  by  owner  or  tenant,  is  vacant 
or  unoccupied  beyond  a  period  of  ten  days."^^  Vacancy  has 
been  considered  as  meaning  the  absence  of  any  person  or  thing, 
while  unoccupancy  refers  to  the  absence  of  persons.  A  build- 
ing which  is  unoccupied  is  not  necessarily  vacant  but  either  of 
these  conditions  is  sufficient  to  suspend  the  policy.  This  pro- 
vision has  In  the  main  been  held  valid  by  the  courts.  Experi- 
ence shows  that  the  hazard  is  increased  by  vacancy  or  unoc- 
cupancy, inasmuch  as  under  such  circumstances  there  is  no  one 
on  the  premises  by  whom  the  presence  of  fire  may  be  promptly 
detected.  Vacant  or  unoccupied  premises  also  increase  the 
danger  of  accidental  fires  caused  by  irresponsible  persons. 

A  company  is  not  liable  for  property  "while  Incumbered 
by  a  chattel  mortgage,  and  during  the  time  of  such  Incumbrance 
this  Company  shall  be  liable  only  for  loss  or  damage  to  any 
other  property  insured  hereunder."^^     The  chattel  mortgage 


"  Appendix  XXX,  lines  52-55. 
="*  Appendix  XXX,  lines  56-58. 
"  Appendix  XXX,  lines  65-67. 


THE  FIRE  INSURANCE  CONTRACT        217 

Is  regarded  as  objectionable  because  it  frequently  indicates  the 
poor  financial  condition  of  the  insured,  and  the  property  also 
usually  depreciates  in  value  before  payment  for  it  is  completed. 
A  custom  of  business  requiring  chattel  mortgages  may  induce 
a  company  to  waive  its  objections  but  liens  on  personal  prop- 
erty are  in  general  avoided.  It  will  be  noted  that  the  contract 
Is  hereby  specifically  stated  to  be  divisible  and  not  "entire." 

The  company  Insures  the  property  "while  located  and  con- 
tained as  described  herein,  or  pro  rata  for  five  days  at  each 
proper  place  to  which  any  of  the  property  shall  necessarily  be 
removed  for  preservation  from  fire,  but  not  elsewhere. "^^  The 
policy  is  thus  suspended,  according  to  its  terms,  while  the 
property  Is  not  in  the  location  described.  While  the  language 
employed  could  hardly  be  stronger  or  clearer,  the  courts  have 
been  lenient  toward  the  Insured.  In  various  jurisdictions  vary- 
ing decisions  hav^e  been  rendered.  Thus,  a  policy  on  a  car- 
riage destroyed  while  out  for  repairs  was  held  valid  on  the 
ground  that  the  company  must  have  contemplated  the  moving 
of  the  carriage  for  this  purpose  when  it  wrote  the  policy,  but 
in  another  case  a  policy  on  a  fire  engine  was  declared  void  be- 
cause the  engine  was  destroyed  while  at  a  fire.  In  general,  it 
would  seem  equitable  to  take  Into  account  the  nature  of  the 
subject  of  Insurance,  although  this  may  give  rise  to  difficult 
cases  in  practice. 

Finally,  there  Is  a  blanket  clause  Intended  to  cover  other  acts 
of  the  Insured  not  already  enumerated,  to  the  effect  that  the 
company  shall  not  be  liable  "while  the  hazard  Is  Increased  by 
any  means  within  the  control  or  knowledge  of  the  Insured." 

Voidance. — As  previously  stated,  the  actions  which  render 
the  policy  permanently  void  have  been  considerably  reduced 
In  number  by  the  New  York  form.  Those  which  remain  may 
be  divided  into  two  groups,  ( 1 )  provisions  dealing  with  mis- 
representation and   (2)   provisions  dealing  with  ownership. 

The  policy  provides  that  "This  entire  policy  shall  be  void 
If  the  Insured  has  concealed  or  misrepresented  any  material 
fact  or  circumstance  concerning  this  Insurance  or  the  subject 
thereof,"  and  "In  case  of  any  fraud  or  false  swearing  by  the 
insured  touching  any  matter  relating  to  this  Insurance  or  the 
subject  thereof,  whether  before  or  after  a  loss."^*     Good  faith 

"  Appendix  XXX. 

•■"  Appendix  XXX,  lines  1-6. 


218    INSURANCE  PRINCIPLES  AND  PRACTICES 

is  an  important  element  of  every  insurance  contract  and  the 
insurer  and  insured  are  both  supposed  to  be  in  possession  of 
the  same  facts  if  such  facts  are  material.  It  is,  however,  very 
difficult  to  prove  concealment  or  misrepresentation,  as  it  is 
necessary  to  show  that  this  occurred  with  intent  to  deceive  and 
that  it  was  material  to  the  contract.  It  is  usually  held  that  if 
the  company  does  not  make  the  inquiry  the  insured  is  not 
bound  to  divulge  any  information.  On  the  other  hand,  the 
insured  must  not  suppress  any  information  which  the  com- 
pany seeks  to  obtain.  If  the  statements  of  the  insured  could 
be  considered  as  warranties  it  would  be  sufficient  to  void  the 
contract  if  the  company  showed  that  they  were  untrue,  but 
the  laws  of  many  States  hold  the  statements  of  the  insured  to 
be  merely  representations  which  become  significant  only  if  un- 
true materially  and  made  with  intent  to  deceive.  But  the 
courts  have  not  been  so  lenient  in  their  treatment  of  fraudu- 
lent statements  made  following  a  loss,  although  mere  mistakes 
are  not  sufficient  to  invalidate  the  policy.  In  the  former  stand- 
ard policy  plans  and  descriptions  of  the  property  were  stated 
to  be  warranties,  but  the  laws  referred  to  made  this  provision 
nugatory. 

The  policy  is  void  "if  the  interest  of  the  insured  be  other 
than  unconditional  and  sole  ownership,"  unless  otherwise  pro- 
vided.^^  As  described  in  a  previous  chapter,  however,  the  in- 
terest of  a  mortgagee  may  be  and  sometimes  is  insured  by  his 
own  policy  and  the  owner  of  the  property  may  have  a  mortgage 
clause  endorsed  on  his  policy  for  the  protection  of  the  mort- 
gagee. According  to  this  provision  an  insurable  interest  is 
not  sufficient  to  make  the  contract  valid.  A  few  illustrations 
will  make  this  plain.  A  stockholder  in  a  corporation  is  part 
owner  of  the  assets  of  the  corporation  but  he  is  not  a  sole 
and  unconditional  owner  because  the  title  and  ownership  is 
vested  in  an  artificial  body,  the  corporation.  Again  a  person 
may  be  entitled  to  royalties  from  the  use  of  certain  property, 
but  he  is  not  the  sole  and  unconditional  owner.  A  partner  has 
an  insurable  interest  in  the  property  of  the  firm,  but  does  not 
comply  with  the  requirements  of  sole  ownership.  It  has  been 
held  by  the  courts,  however,  that  mortgaging  the  property 
does  not  deprive  the  insured  of  sole  and  unconditional  owner- 
ship, inasmuch  as  while  he  cannot  dispose  of  the  property,  he 

"  Appendix  XXX,  lines  22  and  23. 


THE  FIRE  INSURANCE  CONTRACT        219 

can  dispose  of  his  interest  therein.  Where  property  is  pur- 
chased on  the  installment  plan  and  the  seller  retains  the  title 
until  the  installments  are  paid,  the  status  of  the  buyer  is  doubt- 
ful. Such  interests  are  provided  for  by  forms  referred  to  in 
the  next  chapter. 

Unless  otherwise  provided  the  policy  is  void,  "if  the  subject 
of  insurance  be  a  building  on  ground  not  owned  by  the  insured 
in  fee  simple. "***  Fee  simple  is  a  title  free  from  condition  or 
limitation,  the  largest  estate  of  ownership  known  to  the  law. 
For  example,  buildings  standing  on  ground  not  owned  by  the 
insured  may  have  their  value  suddenly  diminished  by  some 
action  taken  with  reference  to  the  ground  and  the  owner  of 
the  buildings  have  the  value  thereof  practically  taken  away 
from  him  by  an  order  to  remove  them. 

Unless  otherwise  provided  the  policy  Is  void,  "if,  with  the 
knowledge  of  the  insured,  foreclosure  proceedings  be  com- 
menced or  notice  given  of  sale  of  any  property  Insured  here- 
under by  reason  of  any  mortgage  or  trust  deed.""  Foreclosure 
proceedings  frequently  lead  to  quarrels  between  the  parties 
involved  and  increase  the  moral  hazard.  Furthermore,  the 
sale  of  a  portion  of  the  property  may  render  the  remaining 
property  proportionately  much  less  valuable.  The  doctrine  of 
entirety  of  the  contract  very  properly  applies  here. 

The  policy  is  also  void  "if  any  change,  other  than  by  the 
death  of  an  Insured,  takes  place  In  the  Interest,  title  or  posses- 
sion of  the  subject  of  Insurance  (except  change  of  occupants 
without  Increase  of  hazard)."  ^^  Insurance  does  not  cover  a 
particular  piece  of  property  but  some  person's  interest  in  that 
property.  It  is  therefore  a  personal  contract  and  the  policy  is- 
sued to  one  person  will  not  cover  another  without  special  agree- 
ment to  that  effect.  Otherwise  a  change  of  possession  or  title 
might  greatly  Increase  the  risk  (inasmuch  as  all  persons  are  not 
equally  reliable  or  careful)  without  the  insurance  company 
being  able  to  protect  itself.  This  clause,  however,  is  not  de- 
signed to  prevent  an  administrator,  executor  or  heirs  from 
obtaining  the  benefit  of  the  Insurance  bought  by  the  deceased, 
or  to  cause  unnecessary  annoyance  to  an  owner  who  rents  his 
premises. 

^Appendix  XXX,  lines  24  and  25. 
"Appendix  XXX,  lines  25-28. 
"Appendix  XXX,  lines  28-31. 


220    INSURANCE  PRINCIPLES  AND  PRACTICES 

The  assignment  of  a  policy  before  a  loss  may  transfer  the 
insurance  to  an  undesirable  person.  In  this  connection,  how- 
ever, see  the  chapter  dealing  with  "Assignment  of  the  Policy" 
where  some  cases  of  assignment  without  consent  are  discussed. 

The  next  provision  to  be  discussed  has  to  do  with  both 
agency  and  the  settlement  of  losses  but  is  inserted  at  this  point 
because,  in  substance,  It  means  that  the  privileges  granted  to 
the  insured  without  endorsements  on  the  policy  in  writing  are 
void  and  that  no  act  required  for  the  purpose  of  settling  a 
loss  shall  be  held  to  void  any  provision  of  the  policy.  The 
subject  of  waiver  may  be  divided  into  three  sections,  refer- 
ring to  ( 1 )  acts  of  the  agent  at  the  time  of  the  Issuance  of 
the  policy,  (2)  acts  of  the  agent  after  the  issuance  of  the 
policy  and  before  a  loss  and  (3)  acts  of  the  agent  after  a 
loss.  The  company  and  its  agents  must  be  exceedingly  careful. 
In  spite  of  the  provision  referred  to,  not  to  do  anything  which 
may  be  construed  as  a  waiver.  After  the  policy  has  been  is- 
sued it  is  generally  held  that  waiver  must  be  In  writing.  If, 
prior  to  the  issuance  of  the  policy,  the  company  or  its  agents 
are  well  aware  of  a  condition  which  exists  with  respect  to  such 
property  the  company  may  be  held  to  have  waived  the  pro- 
vision in  the  policy  applicable  to  such  condition.  It  was  very 
difficult  for  the  company  to  deal  with  the  Insured  in  the  settle- 
ment of  losses  without  waiving  a  violation  under  the  old  form 
of  policy.  It  Is  the  practice,  therefore,  for  the  company  to 
attempt  to  have  the  insured  sign  a  non-waiver  agreement  pro- 
viding that  the  actions  of  the  company  or  Its  representatives  in 
settling  a  loss  shall  not  be  considered  as  a  waiver  of  any  of  its 
rights.  Otherwise  It  might  be  inferred  that  an  insurance  com- 
pany waived  a  forfeiture  of  the  policy,  for  example,  by  pro- 
ceeding to  attempt  an  estimate  of  the  amount  of  the  loss,  or 
by  a  submission  of  a  claim  to  arbitration.  The  present  policy 
Is  better  worded  from  the  standpoint  of  the  company.  It 
reads,  "No  one  shall  have  power  to  waive  any  provision  or 
condition  of  this  policy  except  such  as  by  the  terms  of  this 
policy  may  be  the  subject  of  agreement  added  hereto,  nor  shall 
any  such  provision  or  condition  be  held  to  be  waived  unless 
such  waiver  shall  be  In  writing  added  hereto,  nor  shall  any 
provision  or  condition  of  this  policy  or  any  forfeiture  be  held 
to  be  waived  by  any  requirement,  act  or  proceeding  on  the 
part  of  this  Company  relating  to  appraisal  or  to  any  examina- 


THE  FIRE  INSURANCE  CONTRACT        221 

tion  herein  provided  for;  nor  shall  any  privilege  or  permission 
affecting  the  Insurance  hereunder  exist  or  be  claimed  by  the 
insured  unless  granted  herein  or  by  rider  added  hereto."''"'  The 
original  form  provided  that  "No  officer,  agent  or  other  repre- 
sentative of  this  Company  shall  have  power  to  waive  any  pro- 
vision or  condition  of  this  policy  except  such  as  by  the  terms, 
etc,"  but  the  courts  repelled  the  suggestion  that  one  who  was 
held  out  as  a  general  agent  could  not  bind  the  company  by  his 
acts. 

Loss  settlements. — The  provisions  of  the  policy  relating  to 
the  settlement  of  losses  are  so  extensive  and  the  principles  in- 
volved are  so  important,  that  a  separate  chapter  is  devoted  to 
their  consideration.      (Chapter  XVIII). 

"Appendix  XXX,  lines  78-88. 


Chapter  XV 

FIRE  INSURANCE  FORMS  AND  CLAUSES 

Since  the  standard  policy  form  is  rigid  in  nature  and  not 
adapted  to  all  sets  of  circumstances  as  it  stands,  it  is  therefore 
frequently  necessary  to  modify  It  by  the  addition  of  endorse- 
ments or  "riders."  For  example,  some  endorsement  77iust 
be  made  on  the  policy  to  give  a  description  of  the  property 
insured,  while  an  endorsement  may  be  made  whereby  the  pro- 
hibition of  vacancy  is  temporarily  waived.  It  Is  In  this  con- 
nection that  the  fire  insurance  broker  Is  In  a  position  to  render 
the  greatest  service  to  his  client.  He  should  be  able,  by  reason 
of  his  experience  In  insurance  and  his  knowledge  of  the  In- 
sured's business,  to  suggest  endorsements  which  are  necessary 
to  adapt  the  standard  form  to  the  circumstances  of  the  par- 
ticular case.  It  is  necessary,  furthermore,  that  these  endorse- 
ments be  worded  so  as  to  give  to  the  Insured  the  protection 
which  he  requires  and  believes  that  he  Is  getting. 

Endorsements  on  the  standard  fire  policy  may  be  divided 
into  two  groups  ( 1 )  forms,  which  are  descriptive  In  char- 
acter and  aim  to  supply  something  which  Is  missing  in  the  stan- 
dard policy  and  (2)  clauses,  which  are  permissive  or  re- 
strictive In  character  and  Intended  to  alter  some  portion  of  the 
standard  policy.  We  will  discuss  the  groups  In  this  order. 
Forms  may  be  subdivided  Into  two  classes  ( 1 )  those  which 
are  intended  to  describe  who  and  what  Is  Insured  and  where 
the  property  is  located  and  (2)  those  which  cover  some  lia- 
bility other  than  fire,  such  as  profit  Insurance. 

Descriptive  forms: 

1.  Ownership. — The  standard  policy  provides  that  the 
person  Insured  shall  be  the  sole  and  unconditional  owner  of 
the  property,  in  which  case  it  is  only  necessary  to  insert  his 
name.  In  the  case  of  a  firm  whose  partners  change,  or  of 
a  partnership  which  changes  to  a  corporation,  some  question 
may  arise  as  to  whether  the  policy  continues  to  cover  the  new 
arrangement.     Thus  the  words  "as  now  or  hereafter  consti- 

222 


FIRE  INSURANCE  ENDORSEMENTS         223 

tuted"  are  frequently  added  to  partnership  policies.  But 
there  are  many  cases  where  the  interest  is  not  sole  or  uncon- 
ditional. It  is  doubtful,  for  example,  whether  the  buyer  on  an 
installment  plan  to  whom  the  title  does  not  pass  until  the  last 
payment  is  made  is  an  unconditional  owner.  The  insertion  of 
The  name  of  the  insured  therefore  takes  various  forms  and 
in  these  forms  the  interest  of  the  insured  should  be  very  ex- 
actly described.  To  illustrate,  the  policy  provision  is  violated 
if  the  property  Is  owned  by  a  wife  and  insured  in  the  name 
of  her  husband,  or  if  the  property  is  owned  by  a  firm  and 
insured  in  the  name  of  an  individual.  Property  may  be  in- 
sured in  the  name  of  a  person's  estate.  A  form  may  also  be 
added  to  the  policy  stating  that  it  is  understood  that  the  build- 
ing covered  by  the  policy  stands  on  leased  grounds,  the  form 
being  inserted  in  order  to  avoid  the  prohibition  in  the  policy 
of  such  a  condition.  The  policy  also  provides  that  a  chattel 
mortgage  shall  not  exist  without  the  knowledge  and  permis- 
sion of  the  company  and  this  fact  must  therefore  be  disclosed 
in  the  description  of  the  interest  of  the  insured.  Such  chattel 
mortgages  frequently  arise  from  the  purchase  of  machinery 
and  their  existence  must  be  recognized  in  the  policy;  a  form 
stating  that  the  existence  of  such  mortgages  will  not  invali- 
date the  policy  Is  sufficient.  The  policy  provision  against  fore- 
closure Is  sometimes  waived  and  permission  given  for  the 
execution  of  contracts  of  sale  which  are  stated  not  to  preju- 
dice the  Insurance. 

It  Is  frequently  necessary  for  a  person  to  insure  goods  be- 
longing to  others  and  the  so-called  "commission  form"  is  com- 
monly used  for  this  purpose.  A  description  may  be  Inserted  cov- 
ering goods  "either  owned  or  held  by  them  In  trust,  or  on  com- 
mission, or  sold  but  not  delivered  or  removed,  or  for  which  the 
insured  may  be  liable,  and  the  property  of  others  In  storage 
or  for  repairs."  For  example,  a  commission  merchant  may 
sell  textiles  and  the  manufacturer  may  deliver  to  him  goods 
which  are  not  yet  sold.  The  commission  merchant  may  make 
advances  to  the  manufacturer  on  such  goods,  holding  the 
goods  as  collateral  for  the  loan.  They  are  held  by  him  in  trust 
or  on  commission.  Under  the  commission  clause,  in  the  event 
of  loss,  the  loss  Is  payable  to  the  commission  merchant,  who 
then  returns  to  the  real  owner  the  amount  due  over  and  above 
his  Interest  as  agent  or  trustee. 


224    INSURANCE  PRINCIPLES  AND  PRACTICES 

2.  Description  of  the  property.^ — It  Is  essential  that  the 
form  describing  the  property  shall  cover  all  that  It  Is  Intended 
to  Include.  It  is  also  necessary  to  be  careful  that  the  descrip- 
tive form  does  not  modify  some  liability  which  Is  expected  to 
be  assumed  entirely.  The  form  ordinarily  does  not  cover 
"building  and  contents"  because  of  the  different  premium  rates 
upon  these  two  classes  of  property.  In  the  policy  upon  the 
building  it  is  common  to  enumerate  a  number  of  permanent 
fixtures  such  as  heating  and  lighting  apparatus,  and  If  machin- 
ery is  insured  as  a  separate  Item,  it  Is  desirable  to  see  that 
the  machinery  covered  under  the  building  item  is  distinguished 
from  that  covered  under  the  machinery  policy.  This  may  be 
done  by  a  simple  statement  of  such  an  Intention.  In  the  case  of 
policies  on  stock  the  property  may  be  described  as  "stock, 
samples,  materials,  boxes,  cases,  labels  and  supplies  (manu- 
factured, unmanufactured,  and  In  process  of  manufacture  if 
the  risk  is  a  manufacturing  risk)."  In  all  these  cases  it  Is  ad- 
visable to  avoid  Indefinite  expressions.  "Fixed  machinery," 
"machinery  pertaining  to  the  business,"  "such  goods  as  are 
usually  carried  for  sale,"  "contents,"  etc.,  are  expressions 
which  are  very  general  in  character  and  their  meaning  Is  difii- 
cult  to   define    accurately. 

3.  Location  of  the  property. — It  is  also  necessary  to  state 
clearly  the  location  of  the  property  inasmuch  as  the  policy 
covers  only  while  the  property  is  in  the  location  described.  A 
common  description  is  property  "contained  in  and  on  buildings, 
additions,  and  extensions  situated  at  a  given  location."  This 
expression  is  sometimes  extended  to  read  also,  "about  the 
buildings,  additions  and  extensions,"  which  greatly  extends  the 
scope  of  the  coverage.  Policies  covering  household  furni- 
ture frequently  Include  the  property  of  guests  while  In  the 
house.  If  the  property  is  of  considerable  value  it  may  happen 
that  the  insurance  taken  will  not  reach  the  required  percentage 
of  the  value,  in  which  case  the  owner  of  the  furniture  becomes 
subject  to  the  provisions  of  the  coinsurance  clause  referred  to 
later.  In  describing  the  location,  there  is  the  same  objection 
to  the  use  of  loose  and  Inaccurate  expressions  such  as  "prem- 
I'scs,"  "adjoining,"  "communicating,"  the  meaning  of  which 
may  be  called  in  question  after  the  loss  occurs. 

4.  Forms  covering  more  than  one  location. — Some  kinds 
of  property  are,  by  their  very  nature,  designed  to  move  about 

*  For  a  household  form  see  Appendix  XXXV. 


FIRE  INSURANCE  ENDORSEMENTS        225 

and  it  is  therefore  necessary  to  have  forms  which  will  cover 
them  wherever  they  may  be.  Such  forms  make  a  policy  a 
"floating"  policy.  One  form  is  that  designed  to  cover  the 
clothing  and  personal  property  of  travellers  and  is  therefore 
known  as  a  "tourist"  form.  This  protects  the  property  of 
the  insured  and  of  the  members  of  his  family  wherever  they 
may  go  in  the  United  States,  Mexico,  or  Canada,  or  while 
being  transported.  If  the  property  separates  and  is  in  more 
than  one  location  at  the  same  time,  the  policy  will  cover  it  pro- 
portionately in  the  several  locations.  The  fire  form  affords 
protection  against  fire  only  but  a  marine  form  usually  pro- 
tects against  perils  of  navigation  and  theft,  but  not  pilferage. 
A  form  of  this  type  does  not  cover  the  property  at  any  place 
where  the  insured  has  a  specific  policy  on  the  same  property. 
Upon  payment  of  a  loss  the  insurance  company  is  subrogated 
to  the  insured's  rights  against  the  transportation  company, 
if  any.  This  type  of  insurance  is  sometimes  written  on  spe- 
cific articles  of  personal  property  which  arc  carried  about  by 
artists,  actors,  musicians,  etc. 

Other  forms  of  this  character  are  necessary  to  protect  com- 
mon carriers  on  property  In  their  hands  for  transportation, 
and  to  protect  owners  against  loss  of  their  own  property  while 
in  transportation.  These  insure  the  carrier  against  the  loss 
which  would  result  from  his  legal  liability  for  the  safety  of 
the  goods,  or  the  owner  against  any  loss  which  would  result 
when  the  carrier  was  not  legally  liable.  The  insurance  com- 
pany's liability  in  these  cases  obviously  depends  upon  whether 
the  carrier  or  owner  is  legally  liable  for  the  loss  resulting 
from  fire. 

Another  form  of  "floater"  Is  the  "excess  floater."^  The 
object  of  this  form  is  to  indemnify  the  insured  to  the  extent 
that  any  specific  insurance  covering  the  property  at  a  definite 
location  is  insuflicient.  The  excess  insurance  may  cover  at  one 
location  but  frequently  floats  over  and  protects  property  In 
several  locations.  In  the  case  of  excess  insurance  the  com- 
pany is  not  liable  for  any  loss  until  that  loss  exceeds  the  amount 
of  specific  insurance  on  the  property.  Suppose  that  an  owner 
has  goods  In  three  locations;  $10,000  at  "A,"  $4,000  at 
"B"  and  $2,000  at  "C."  He  obtains  specific  policies  cover- 
ing the  full  value  of  the  property  at  each  of  the  locations 
named.     This  property,  however,  Is  of  such  a  nature  that  it 

'  See  Appendix  XXXIV. 


226    INSURANCE  PRINCIPLES  AND  PRACTICES 

moves  about  from  place  to  place  or  the  respective  values  at 
the  different  locations  are  constantly  changing. 

Let  us  presume  that  the  property  at  "A"  declines  to  $5,000, 
and  that  the  property  at  "B"  and  "C"  is  increased  to  $7,000 
and  $4,000  respectively  and  that  a  fire  at  "B"  destroys  $5,000 
worth  of  property.  The  insured  under  these  circumstances 
has  only  $4,000  of  Insurance  at  "B"  and  consequently  loses 
$1,000  by  the  fire,  although  his  endeavor  was  to  be  fully  pro- 
tected. Suppose  however,  with  the  facts  as  originally  stated, 
that  the  owner  takes  out  three  specific  policies  of  $5,000  each, 
covering  at  "A",  "B",  and  "C"  respectively,  and  in  addition 
takes  an  excess  floating  policy  of  $5,000.  If  then  the  change 
In  the  situation  which  we  have  described  above  takes  place  and 
the  assumed  loss  at  "B"  Is  $6,000,  he  could  recover  the  full 
amount;  the  specific  Insurance  amounting  to  $5,000  and  the 
floating  Insurance  to  $5,000.  The  specific  insurance  would  con- 
tribute $5,000  of  the  loss  and  the  floating  policy  $1,000  of  the 
loss,  since  the  latter  Is  liable  only  for  the  excess  over  and  above 
the  specific  policy.  Such  a  form,  however,  is  usually  subject 
to  a  reduced  rate  average  clause  which  is  described  hereafter. 

Forms  covering  other  than  direct  loss. — The  standard  fire 
policy  provides  protection  against  all  direct  loss  or  damage  by 
fire,  but  In  many  cases  the  fire -inflicts  as  much  damage  on  the 
Insured  by  reason  of  the  results  following  the  fire,  as  by  the 
actual  destruction  of  his  property.  Certain  forms  enable  the 
fire  Insurance  company  to  give  the  Insured  protection  against 
these  consequential,  as  distinguished  from  direct,  losses. 

1.  Use  and  occupancy  insurance.^  This  term  is  applied  to 
different  varieties  of  insurance,  but  in  general  may  be  said  to  be 
insurance  which  is  designed  to  protect  against  ( 1 )  loss  of 
profits  as  the  result  of  Inability  to  operate  a  manufacturing  or 
sales  business  because  its  property  is  destroyed  by  fire  and  (2) 
certain  payments  which  must  be  made  even  though  the  busi- 
ness cannot  operate,  such  as  fixed  charges,  expenses,  and  wages. 
In  the  case  of  certain  non-profit  corporations  the  first  item  is 
absent  while  the  latter  Is  present.  Where  the  word  "business" 
is  used  in  the  form  it  is  considered  to  mean  either  (a)  in  a 
manufacturing  property,  the  production  of  goods;  (b)  In  a 
mercantile  property,  the  sale  of  goods;  or  (c)  in  other  classes 
of  property,  the  business  operations  usual  to  that  class. 

*  See  Appendix  XL. 


FIRE  INSURANCE  ENDORSEMENTS        227 

Insurance  applies  only  If  the  said  building,  machinery,  equip- 
ment or  stock  is  damaged  by  fire  so  as  to  cause  a  total  or  par- 
tial suspension  of  business.  Damage  to  property  other  than 
that  described,  even  though  it  may  result  in  loss  of  profits,  does 
not  entitle  the  insured  to  indemnity.  The  company  is  liable 
only  up  to  the  amount  of  the  actual  loss  sustained  for  a  duration 
of  time  not  exceeding  that  reasonably  required  to  rebuild,  re- 
pair, or  replace  the  property,  and  only  to  the  extent  of  such  fixed 
charges  and  expenses  as  must  necessarily  continue  during  the 
suspension.  The  latter  must  be  determined  from  the  circum- 
stances of  the  case;  one  business  may  be  able  to  let  all  of  its 
employees  go  without  injury,  while  another  must  retain  every 
employee. 

There  are  some  limitations  upon  the  above  coverage.  It  is 
usually  provided  that  "during  the  time  of  a  total  suspension  of 

business,  liability  under  this  policy  shall  not  exceed  $ for 

each  business  day  of  such  suspension."  The  usual  case  is  that 
the  amount  entered  here  is  less  than  the  amount  of  loss  which 
is  actually  suffered,  or  in  other  words,  full  protection  is  not 
taken.  During  a  partial  suspension  of  business,  i.e.,  when  pro- 
duction is  only  a  portion  of  what  can  be  produced  under  normal 
circumstances,  the  liability  of  the  company  is  ascertained  by  the 
following  ratio: 

Full  Production — Present  Production       Loss  per  day  or  Company's  Liability 

Full  Production  Daily  liability  for  total  suspension 

or 

Decrease  in  Production  pgr  diem  liability  for         ^  , 

— — of  ,  •  =  Loss  per  day 

Full  Production  total  suspension 

In  the  above  equations  the  present  production  is  easily  as- 
certained, and  the  "full,"  or  "normal"  production  is  defined  as 
the  average  daily  production  (or  business)  of  all  plants  or 
properties  herein  described  for  the  ...  .  days  of  full  operation 
next  preceding  the  fire.  The  maximum  daily  liability  for  total 
suspension  is  named  In  the  policy  but  the  actual  daily  liability 
cannot  exceed  the  actual  dally  loss.  The  tendency  of  the  busi- 
ness, that  is,  the  increase  or  decrease  in  daily  production  may 
be  taken  Into  account  In  ascertaining  the  loss,  so  that  a  declining 
business  cannot  recover  more  than  It  would  have  made  if  it  had 


228    INSURANCE  PRINCIPLES  AND  PRACTICES 

continued  in  operation.     These  adjustments  are  very  important 
in  seasonal  businesses  such  as  the  clothing  industry, 

2.  Rent  insurance. — This  may  be  defined  in  general  as  insur- 
ance designed  to  protect  a  landlord  against  the  loss  of  income 
that  would  result  from  a  fire.  The  company  agrees  that  if  the 
building  or  a  part  of  the  building  shall  become  untenantable  by 
reason  of  fire  the  owner  shall  be  entitled  to  indemnity  for  the 
actual  loss  of  rents  resulting,  but  not  exceeding  the  amount  in- 
sured. The  loss  is  to  be  computed  from  the  rentals  being  re- 
ceived at  the  time  of  the  fire.  The  company's  liability  contin- 
ues for  the  time  necessary  to  put  the  premises  in  a  ten- 
antable  condition.  The  insured  agrees  to  carry  insurance  equal 
to  100  per  cent  of  the  rents  or  to  have  his  indemnity  reduced 
proportionately  and  under  this  form  of  insurance  the  indemnity 
is  perfectly  definite.  A  form  covering  leasehold  interests  in- 
sures not  only  the  rent  which  the  lessee  or  middleman  pays 
to  the  owner  but  also  the  profit  which  such  middleman  or  les- 
see makes  by  subletting  the  premises.  Or  such  insurance  may 
cover  his  interest  in  a  building  which  he  erects  on  leased  ground. 
It  is  impossible  to  discuss  here  the  various  forms  which  may  be 
used  to  cover  possible  situations  created  by  the  terms  of  leases, 
such  different  situations  being  obviously  very  numerous. 

3.  Profit  insurance. — Fire  insurance  agrees  to  indemnify  the 
insured  for  the  loss  of  his  stock  and  profit  insurance  furnishes 
the  additional  protection  of  guaranteeing  him  his  profits  upon 
such  goods  as  are  destroyed.  This  is  obviously  a  dangerous 
form  of  insurance  because  of  the  moral  hazard  involved.  The 
insured,  after  a  fire,  can  collect  all  that  he  would  have  received 
if  the  goods  had  not  been  destroyed,  and  does  not  have  the 
trouble  of  waiting  for  the  profits  to  be  realized  or  run  the 
danger  of  losing  them. 

4.  Sprinkler  leakage  insurance. — The  installation  of  auto- 
matic sprinklers  reduces  the  danger  of  loss  by  fire.  Such  sprink- 
lers come  into  action  by  reason  of  an  increase  in  temperature, 
whether  caused  by  fire  or  otherwise,  and  sometimes  flood  the 
premises  with  water  when  there  is  no  fire.  Against  the  loss 
which  results  from  such  an  event  this  form  of  insurance  fur- 
nishes protection.^ 

Clauses. — While  forms  were  designed  to  supplement  the 
standard  policy,  clauses  are  designed  to  modify  its  provisions. 
We  will  classify  the  clauses  according  to  the  purposes  which 

*  See  Appendix  XXXIX. 


FIRE  INSURANCE  ENDORSEMENTS        229 

they  are  designed  to  serve.  It  would  take  an  entire  volume 
to  give  merely  the  wording  of  all  the  various  clauses  in  use  and 
we  have  here  noted  only  the  more  common. 

1.  Permits. — We  have  seen  that  the  standard  fire  policy 
contains  a  number  of  provisions  which  the  insurance  company 
may  be  quite  willing  to  waive  while  there  are  others  which  can- 
not be  changed.  Those  provisions  which  may  be  waived  give 
rise  to  various  clauses  designed  to  give  the  insured  permission 
to  do  something  which  the  policy  prohibits  without  the  consent 
of  the  Insurer.     Some  Illustrations  of  this  type  are: 

a.  A  clause  permitting  the  insured  to  move  the  property 
from  the  location  described  without  voiding  the  policy. 

b.  A  clause  permitting  extensive  alterations  and  repairs 
to  be  carried  on. 

c.  A  clause  permitting  the  premises  to  remain  vacant  for  a 
period  exceeding  10  days,  or  similarly  to  remain  unoccupied. 

d.  A  clause  permitting  overtime  operations  or  night  work 
in  a  manufacturing  establishment. 

e.  A  clause  permitting  some  dangerous  article  to  be  stored 
on  the  premises.^ 

2.  Decreasing  the  liability  or  hazard. — In  special  circum- 
stances there  are  some  risks  which  the  Insurer  does  not  desire 
to  assume,  and  there  are  others  which  he  is  willing  to  assume 
only  under  stipulated  conditions.  Clauses  adapted  to  meet 
these  conditions  are  either  clauses  In  which  the  Insurer  disclaims 
liability  or  clauses  In  which  he  disclaims  liability  unless  certain 
precautions  are  taken  by  the  insured.  The  following  are  illus- 
trations. 

a.  Spontaneous  Combustion  clause,  by  which  the  under- 
writer exempts  himself  from  liability  for  fires  resulting  from 
spontaneous  combustion  of  certain  articles. 

b.  Consequential  Damage  clause,  by  which  the  underwriter 
exempts  himself  from  liability  for  certain  kinds  of  consequential 
damage;  for  example,  the  loss  which  would  result  from  a  change 
In  temperature  of  a  cold-storage  warehouse,  or  the  consequential 
damage  resulting  from  a  fall  In  temperature  in  a  green-house. 

c.  Dynamo  clause,  which  exempts  the  company  from  lia- 
bility for  damage  to  dynamos,  switches,  and  electrical  apparatus 
caused  by  electrical  current  unless  It  Is  the  result  of  an  outside 
fire. 

"  See  Appendix  XXXVIII. 


230    INSURANCE  PRINCIPLES  AND  PRACTICES 

d.  Acetylene  gas  permit  or  warrant,  which  permits  the  use 
of  acetylene  gas  provided  the  manufacturing  machine  is  con- 
tained in  a  separate  and  independent  building  constructed  ac- 
cording to  specifications. 

e.  Gasoline  permits,  of  a  character  similar  to  the  above/ 

f.  A  warranty  that  the  premises  will  be  occupied  only  by 
the  owner  and  his  family. 

g.  A  warranty  that  in  return  for  a  reduced  premium 
granted  because  of  an  automatic  sprinkler  system  the  insured 
will  maintain  said  sprinkler  in  good  condition  and  will  not  make 
alterations  in  the  water  supply  without  consent. 

h.  Permission  for  the  use  of  electricity  accompanied  by 
certain  warranties  as  to  the  nature  of  the  installation  and  its 
maintenance. 

3.  Clauses  respecting  title  and  interest. — These  are  clauses 
which  are  necessary  in  order  to  permit  the  insurance  of  an  in- 
terest other  than  sole  and  unconditional  ownership.  The  two 
following  are  most  important: 

a.  Mortgagee  clause,  which  gives  additional  security  to  a 
mortgagee  by  exempting  him  from  liability  for  the  acts  or 
omissions  of  the  mortgagor,  he  In  turn  promising  to  do  certain 
things  for  the  benefit  of  the  company.^  This  was  fully  dis- 
cussed In  the  chapter  on  Insurable  Interest. 

b.  Loss  payable  clause,  which  states  that  the  loss,  If  any,  is 
payable  to  a  named  party  as  his  interest  may  appear.^  This  also 
was  referred  to  in  the  chapter  on  Insurable  Interest. 

4.  Emergency  Clauses. — These  are  not  In  common  use  In  the 
United  States,  with  the  exception  of  binders. 

a.  A  binder  in  a  sense  might  be  considered  a  clause  of  this 
character,  inasmuch  as  the  conditions  of  the  policy  are  made  part 
of  the  binder  and  the  binder  thus  becomes  an  attachment  of 
the  policy.  The  binder  Is  used  to  give  immediate  protection 
until  the  policy  Is  written.^ 

b.  A  clause  providing  that  the  insurance  shall  immediately 
cease  in  the  event  of  an  earthquake. 

c.  A  clause  providing  that  the  company  shall  not  be  liable 
for  loss  or  damage  occasioned  by  or  through  any  volcano,  eartli- 

"See  Appendix  XXXVIII. 

"  See  Appendices  XXXII  and  XXXIII. 

*See  Appendix  XXXVII. 

'  See  Appendix  XLI. 


FIRE  INSURANCE  ENDORSEMENTS        231 

quake,  hurricane  or  other  eruption,  convulsion,  or  disturbance  of 
nature. 

5.  Clauses  UmiUng  the  amount  payable. — An  effective 
method  of  exerting  control  over  the  insured  is  to  insert  a  pro- 
vision which  will  make  the  amount  he  can  recover  depend  upon 
his  actions.  There  are  therefore  clauses  of  various  kinds  de- 
signed to  limit  the  amount  for  which  the  company  shall  be 
liable  under  specified  conditions. 

a.  Three-fourths  value  clause,  which  provides  that  in  the 
event  of  loss  the  company  shall  not  be  liable  for  more  than 
three-fourths  of  the  cash  value  of  the  property  at  the  time  of 
the  loss.  The  object  of  the  clause  is  to  compel  the  insured  to 
carry  a  portion  of  the  risk  himself  and  thereby  induce  him  to 
exercise  care  so  as  to  reduce  the  risk.  The  endorsement  of  the 
clause  enables  the  risk  to  be  written  at  a  much  lower  premium 
than  would  otherwise  be  possible. 

b.  Three-fourths  loss  clause,  which  limits  the  liability  of  a 
company  to  three-fourths  of  the  total  loss  sustained.  The  ob- 
ject and  results  of  this  clause  are  similar  to  those  of  the  three- 
fourths  value  clause,  but  its  provisions  are  even  stricter  than 
the  provisions  of  the  three-fourths  value  clause. 

c.  Coinsurance  clause,  which  provides  that  the  company 
shall  be  liable  in  the  event  of  loss  only  in  the  proportion  that  the 
insurance  taken  bears  to  the  insurance  required  to  be  taken.^" 
Thus,  an  80  per  cent  coinsurance  clause  requires  that  insurance 
be  taken  to  the  extent  of  at  least  80  per  cent  of  the  value  of  the 
property  and  penalizes  the  insured  in  the  event  of  loss  unless 
this  is  done.  A  100  per  cent  coinsurance  clause  requires  that  the 
insurance  taken  shall  be  equal  to  100  per  cent  of  the  value  of  the 
property.  This  is  a  most  common  and  important  clause  in  fire 
insurance  and  an  illustration  of  its  operation  will  be  useful. 

Let  us  assume  that  a  building  is  valued  at  $40,000  and  is  In- 
sured for  $20,000  under  a  policy  containing  an  80  per  cent  co- 
insurance clause.  This  clause  requires  that  the  Insured  shall 
take  insurance  to  the  extent  of  80  per  cent  of  the  value  of  the 
property  ($32,000),  but  he  has  taken  only  $20,000  Insur- 
ance and  consequently,  In  the  event  of  a  $4,000  loss,  he  would 
be  paid  only  that  proportion  of  the  $4,000  loss  that  the  In- 
surance taken  ($20,000),  bears  to  the  Insurance  required, 
($32,000),  or  five-eighths.     He  would  therefore  receive  five- 

"  See  Appendix  XXXI. 


232    INSURANCE  PRINCIPLES  AND  PRACTICES 

eighths  of  $4,000,  or  $2,500,  instead  of  the  full  indemnity, 
because  he  failed  to  carry  the  amount  of  insurance  required. 
Suppose  that  under  the  same  circumstances  the  loss  had  been 
total.  The  insured  could  recover  five-eighths  of  $40,000, 
or  $25,000,  if  he  had  that  much  insurance,  but  his  recovery 
is  limited  by  the  face  value  of  his  policy  to  $20,000. 

This  is  a  frequently  misunderstood  clause,  because  it  is  usually 
considered  as  applying  to  loss  payments,  whereas  it  is  equally 
logical  to  consider  it  as  a  part  of  the  rate-making  system.  The 
reason  for  its  existence  lies  in  the  fact  that  the  great  majority 
of  losses  are  partial.  Only  one  loss  out  of  twenty-five  is  a  total 
loss  in  cities  and  probably  at  least  70  per  cent  of  the  losses  are 
under  10  per  cent  of  the  value  of  the  property.  The  financial 
operations  of  the  company  are  based  upon  the  assumption  that 
it  takes  in  premiums  sufficient  to  cover  losses  and  in  fixing  the 
rate  of  premium,  whether  it  be  expressed  or  implied,  there  is 
considered  a  certain  percentage  of  insurance  to  value.  Know- 
ing that  few  losses  are  total,  a  lower  rate  could  be  quoted  to 
a  person  taking  100  per  cent  insurance  than  to  one  taking  10 
per  cent.  On  a  $10,000  building  a  loss  of  $1,000  would  be  a 
total  loss  to  the  company  in  the  latter  case  and  only  a  10  per 
cent  loss  in  the  former  case.  Now,  if  the  same  premium  is 
charged  these  two  property  owners  there  is  only  one  other  way 
of  protecting  the  insurance  company  and  maintaining  equity 
between  the  persons  insured,  which  is  to  limit  the  amount  which 
the  under-insured  person  can  collect  in  the  event  of  loss.  These 
two  methods  of  adjusting  the  rate  or  adjusting  the  amount  pay- 
able of  losses  can  be  made  mathematically  equivalent. 

Viewed  from  the  standpoint  of  the  insured  the  coinsurance 
clause  is  equally  necessary.  If  everyone  could  take  whatever 
percentage  of  insurance  he  pleased  and  all  received  the  same 
rate,  the  statistics  cited  above  would  show,  on  a  moment's  con- 
sideration, the  financial  benefit,  in  most  cases,  of  taking  only  a 
small  amount  of  insurance.  The  person  taking  a  large  propor- 
tion of  insurance  to  value  however,  would  be  paying  part  of  the 
premiums  of  those  who  were  unwilling  to  take  sufficient  insur- 
ance. If,  on  the  other  hand,  everyone  took  a  small  proportion 
of  insurance  to  value  all  rates  would  have  to  be  materially 
increased. 

d.  The  average  clause. — The  object  of  the  average  clause 
is  essentially  different  from  the  purposes  of  the  three  clauses 
just  discussed.     They  were  designed  to  provide   for  various 


FIRE  INSURANCE  ENDORSEMENTS        233 

kinds  of  loss  adjustments  under  particular  circumstances,  while 
the  average  clause  provides  for  the  distribution  of  the  Insurance 
in  force.  It  reads,  "this  policy  to  attach  in  each  building  or 
locality  in  proportion  as  the  value  in  each  bears  to  that  in  all." 
It  is  true  that  this  clause  fixes  the  limit  to  which  any  policy  is 
liable  in  any  one  particular  place,  or  on  any  specified  property, 
but  if  insurance  is  carried  to  the  full  value  of  all  the  property, 
the  loss  payment  will  not  be  limited  by  this  clause.  On  the  other 
hand,  if  the  property  is  under-insured,  then  under  this  clause  it 
is  equally  under-insured  in  every  location.  If  the  owner  takes 
50  per  cent  insurance  he  is  50  per  cent  under-insured  in  each  lo- 
cation which  the  policy  covers,  irrespective  of  how  the  total 
value  is  distributed  among  the  different  locations. 


Chapter  XVI 

FIRE  INSURANCE  RATES 

Divisions  of  the  subject. — The  most  general  interest  is  natur- 
ally manifested  in  fire  insurance  rates  because  of  the  close  con- 
nection between  this  subject  and  all  other  phases  of  the  business. 
Premiums,  reserves,  state  regulation,  profits  and  commissions 
are  all  involved  in  the  rate  question.  Fire  insurance  rating  may 
be  considered  under  two  heads,  ( 1 )  the  medium  or  agency 
through  which  rates  are  promulgated  and  (2)  the  method  or 
system  by  which  rates  are  calculated.  The  medium  or  agency, 
as  we  have  seen,  is  usually  the  underwriters'  association,  and 
we  shall  have  to  return  to  this  subject  in  considering  the  regu- 
lation of  rates  by  the  several  States.  The  system  or  method 
employed  is  little  understood  by  the  average  person  and  this 
we  will  now  examine. 

The  factors  involved. — In  order  to  fix  equitable  rates  it  is 
necessary  to  take  into  consideration  at  least  three  factors.  In 
the  first  place  time  must  be  considered,  inasmuch  as  the  amount 
of  fire  loss  does  not  remain  uniform,  some  years  being  excep- 
tionally unfortunate  and  others  showing  very  light  losses.  Sec- 
ondly, we  shall  have  to  consider  the  location,  for  losses  in 
Pennsylvania  are  not  necessarily  the  same  as  in  New  York. 
Some  States,  in  fact,  for  unknown  reasons,  almost  constantly 
show  a  bad  experience.  Thirdly,  we  must  take  into  account 
the  difference  in  hazard  between  classes  of  risks  and  individual 
risks.  Naturally  we  will  find  churches  better  risks  than  cot- 
ton mills  and  it  is  equally  certain  that  some  cotton  mills  are 
much  less  hazardous  than  others. 

Classification. — Under  the  earliest  system  in  fire  insurance 
all  risks  were  charged  equal  rates,  a  method  which  ignores 
the  elements  we  have  referred  to  above  and  consequently  is 
possible  only  in  the  primitive  stages  of  the  business.  It  was 
inevitable  that  as  insurance  really  became  a  business  under- 
writers should  begin  to  classify  risks  into  groups,  some  being 
charged  higher  rates  than  others.  At  one  time  only  three 
classes  were  distinguished  but  later  classifications  multiplied 
exceedingly.     When  modern  conditions  were  introduced  into 

234 


FIRE  INSURANCE  RATES  235 

industry  the  classification  had  to  be  extended  to  an  extreme 
degree  or  some  new  method  had  to  be  introduced. 

Judgment  rating. — The  net  result  was  that  rates  began  to  be 
made  largely  on  the  basis  of  individual  judgment.  The  inspec- 
tor simply  estimated  from  his  experience  the  probable  hazard  of 
a  risk  and  fixed  a  rate.  The  great  disadvantage  of  this  sys- 
tem, which  endured  for  many  years,  was  that  not  only  did  the 
judgment  of  different  individuals  vary  but  that  at  different 
times  even  the  same  inspector  did  not  arrive  at  identical  rates 
on  the  same  risk. 

Schedule  rating, — In  order  to  obtain  consistency  and  equity 
it  was  necessary  to  substitute  combined  judgment  for  individual 
judgment,  a  result  which  was  largely  brought  about  by  under- 
writers' associations  and  the  development  of  schedules.  This 
system  involves  the  analysis  of  the  elements  of  hazard  and  the 
assignment  of  a  value  to  each  element.  Values  were  assigned 
to  the  different  elements  of  hazard  on  the  basis  of  the  com- 
bined experience  and  judgment  of  many  able  underwriters.  We 
will  discuss  later  in  this  chapter  some  of  the  prominent  schedules 
which  resulted.  It  is  sufficient  now  to  know  that  the  advantages 
of  this  method  are:  (1)  that  each  feature  of  the  risk  is  con- 
sidered; (2)  results  are  constant  and,  therefore,  equitable  in 
this  respect;  (3)  eliminates  many  of  the  criticisms  of  the  in- 
sured and  of  the  legislator;  (4)  it  encourages  proper  construc- 
tion by  penalizing  defects;  (5)  it  discourages  discrimination  in 
payments  to  brokers  and. agents  for  obtaining  preferred  risks, 
since  all  risks  tend  to  be  equitably  rated  and  equally  profitable; 
and  (6)  it  results  in  more  careful  inspection  and  rating. 

Experience  rating. — The  greatest  defect  of  the  schedule  rat- 
ing system  as  at  present  administered  is  claimed  to  be  the  lack 
of  statistical  evidence  of  the  correctness  of  rates.  Charges  and 
credits  are  based  upon  opinion  rather  than  upon  figures.  Re- 
cently, however,  at  least  one  underwriter  has  turned  his  atten- 
tion to  the  development  of  a  system  designed  to  rest  upon  tabu- 
lated experience.     This  method  will  later  be  briefly  described. 

Classification  of  rates. — We  must  in  the  first  place  distin- 
guish between  rates  upon  buildings  and  upon  their  contents. 
The  former  are  referred  to  as  "building"  rates  and  the  latter 
as  "contents"  rates.  In  regard  to  fundamental  principles,  how- 
ever, there  is  little  difference  between  the  two,  although  a  sat- 
isfactory system  must  meet  the  requirements  of  both.  Secondly, 
we  find  that  rates  naturally  fall  into  three  groups,  depending 


236    INSURANCE  PRINCIPLES  AND  PRACTICES 

upon  the  term  of  the  contract.  An  annual  rate  is  the  rate  for  in- 
surance taken  for  a  term  of  one  year.  A  term  rate  is  a  rate  for 
insurance  for  a  term  of  more  than  one  year.  If  an  insured  takes 
a  five-year  policy,  for  example,  it  may  cost  him  only  three  times 
the  annual  premium.  The  reduction  is  due  to  the  expense  saved 
by  the  company,  the  extra  interest  earned  upon  the  premium  for 
the  longer  period  it  is  held  and  the  additional  reserve  which 
will  be  on  hand  in  case  of  loss.  A  short  rate  is  the  rate  paid  by 
the  insured  who  either  takes  insurance  for  a  term  of  less  than 
one  year  or  who  cancels  his  policy  before  the  stipulated  time 
has  elapsed.^  We  also  notice  several  classifications  of  rates  de- 
pending upon  the  type  of  risk  involved.  A  specific  rate  is  a  rate 
for  an  individual  risk  arrived  at  by  the  application  of  a  schedule. 
Specific  rates  are  almost  sure  to  differ  from  each  other,  due  to 
the  different  elements  of  hazard  considered.  On  the  other 
hand,  a  minimum  rate  is  a  rate  designed  to  cover  a  grade  of 
risks  of  substantially  similar  character,  such  as  frame  dwellings. 
All  risks  within  the  group  receive  the  same  rate.  A  blanket 
rate  is  a  rate  for  insurance  on  risks  in  different  locations,  as 
where  several  different  lumber  yards  are  covered  by  the  same 
policy.  An  average  rate  is  a  rate  covering  several  risks  of  dif- 
ferent character  in  the  same  location,  as  for  instance,  a  rate 
named  upon  the  contents  of  a  department  store.  Minimum 
rates  and  schedule  rates  require  further  discussion. 

Minimum  rates. — The  great  importance  of  minimum  rates 
is  derived  from  the  large  number  of  risks  subject  to  such  rates. 
Minimum  rates  ordinarily  apply  to  dwellings,  churches  and 
other  classes  of  risks  which  do  not  differ  sufficiently  in  char- 
acter of  construction  to  warrant  the  expense  of  applying  a  sched- 
ule. Referring  to  our  historical  development  of  rates  these 
may  be  termed  judgment  rates.  In  a  large  city  practically  one- 
half  of  the  number  of  buildings  consists  of  dwellings,  churches, 
etc.,  as  contrasted  with  buildings  employed  exclusively  for  manu- 
facturing and  mercantile  purposes.  Their  value  and  the  amount 
of  insurance  written  on  them  may,  of  course,  be  much  below  the 
insurance  and  value  of  business  buildings.  Measured  in  terms 
of  dollars  of  premium  the  minimum  rates  class  is  inferior,  but 
measured  in  terms  of  the  number  of  persons  interested  this 
class  is  exceedingly  important.  The  minimum  rates  are  usually 
fixed  by  a  committee  of  the  local  board  of  fire  underwriters  and, 
while  many  elements  of  hazard  may  be  considered,  the  rates  are 

*  See  Appendix  XLIV. 


FIRE  INSURANCE  RATES  237 

recorded  and  published  without  reference  to  these  elements. 
The  following  is  an  example  of  the  results  which  may  be  arrived 
at: — 

TABLE    OF   MINIMUM  RATES   FOR  PRIVATE   DWELLINGS 

Per  $100  insurance 
One  Year  Five  Years 

Brick    or    stone    dwellings $.10  $-40 

Household  furniture  in  same 20  .80 

Small  stores  and  dwellings — brick  or  stone.     .125  .50 

Stocks  of  merchandise   in   same 50 

The  rates  upon  risks  of  this  character  have  been  peculiarly 
subject  to  criticism.  According  to  the  testimony  of  rate  ex- 
perts rates  upon  such  risks,  which  are  based  upon  the  aggre- 
gate loss  theory,  do  not  segregate,  for  example,  the  profits  and 
losses  of  companies  upon  dwellings.  It  is  possible  under  this 
theory  for  the  rates  on  some  classifications  to  be  too  low  and  for 
others  to  be  too  high.  Inasmuch  as  ( 1 )  such  policies  are  taken 
out  by  persons  of  moderate  means;  (2)  It  is  easier  to  add  to  a 
small  rate  than  to  a  large  one;  (3)  high  commissions  are  likely 
to  be  paid  for  this  class  of  business  and  (4)  it  is  a  private 
rather  than  a  business  matter,  discrimination  between  dwellings 
and  other  classes  of  risks  is  rendered  probable  and  easy.  On 
the  other  hand  this  business  is  harder  to  obtain  and  frequently 
lapses. 

Schedule  rates. — Manufacturing  and  mercantile  properties 
are  ordinarily  rated  by  schedules.  A  common  practice  is  to  de- 
velop a  mercantile  schedule  applicable  in  general  to  mercantile 
risks  and  a  series  of  other  schedules  adapted  to  other  groups. 
Such  schedules  analyze  the  various  elements  of  construction, 
occupancy  and  exposure  and  build  up  a  rate  on  the  basis  of  the 
conditions  found.  The  Universal  Mercantile  Schedule  and  the 
Analytic  Schedule,  which  are  In  general  use,  vary  from  each 
other  and  both  are  different  from  the  Experience  Grading  and 
Rating  Schedule. 

Universal  Mercantile  Schedule." — We  will  first  examine  the 
principles  upon  which  the  Universal  Mercantile  Schedule  Is 
constructed,  since  this  schedule  was  first  in  point  of  develop- 
ment and  is  used  with  slight  variations  In  several  of  the  large 
eastern  cities.  It  is  divided  Into  two  principal  parts,  the  first 
dealing  with  conditions  In  the  city  where  the  risk  Is  located,  and 
the  second  with  the  conditions  of  the  risk  itself. 

'  For  sample  of  a  schedul-^  see  Appendix  LL 


238    INSURANCE  PRINCIPLES  AND  PRACTICES 

1.  The  schedule  first  defines  a  standard  city  and  fixes  a  rate 
for  a  standard  building  in  a  standard  city  at  25  cents  per  $100 
of  insurance.  In  order  to  be  considered  as  standard  the  city 
must  possess  a  number  of  qualifications  in  respect  to  fire  pre- 
vention and  protection  which  need  not  be  enumerated  at  length 
here.  Some  cities  are  superior  to  the  standard  city  and  conse- 
quently obtain  a  basis  rate  lower  than  that  named,  while  others 
are  charged  for  various  defects  so  that  their  basis  rates  are 
higher  than  the  figure  given. 

2.  The  rates  referred  to  above  are  for  a  standard  building  in 
a  standard  city.  A  given  building  may  or  may  not  meet  the 
standards  required  and  accordingly  the  basis  rate  for  a  standard 
building  in  a  given  city  will  be  raised  or  lowered  by  the  good 
features  or  deficiencies  of  the  building  in  question.  Thus,  to  the 
basis  rate  for  the  building,  15  cents  may  be  added  for  walls  of 
Insufficient  thickness  and  1  cent  for  a  composition  or  gravel 
roof;  5  cents  for  thin  flooring;  5  cents  for  extra  height;  15 
cents  for  open  stairways,  etc.  A  series  of  deductions  from  the 
rate  in  percentages  for  exceptionally  good  features  are  likewise 
offered.  Thus,  5  per  cent  is  allowed  for  tin  or  sheet  iron  be- 
tween the  floors;  1  per  cent  for  parapet  walls  extending  above 
the  roof,  etc. 

These,  it  will  be  noticed,  are  all  features  of  construction. 
The  schedule  also  takes  into  account  the  nature  of  the  occu- 
pancy. An  occupancy  table  is  drawn  up  and  charges  assigned 
to  be  added  to  the  building  rate  for  the  various  occupancies. 
For  example,  for  advertising  novelties  10  per  cent  is  added  to 
the  rate,  while  for  aluminum  goods  the  addition  is  3  per  cent. 

There  are  certain  deductions  for  devices  designed  to  prevent 
fire  as,  for  Instance,  5  per  cent  credit  for  an  automatic  fire 
alarm,  10  per  cent  for  two  or  more  hydrants,  and  5  per  cent 
for  pails  filled  with  water. 

To  the  rate  as  ascertained  up  to  this  point,  additions  are  made 
for  coinsurance,  adverse  legislation  and  generally  poor  condi- 
tions. Thus,  the  rate  up  to  this  point  is  based  upon  the  assump- 
tion that  the  insured  takes  out  insurance  to  the  extent  of  50 
per  cent  of  the  value  of  the  property.  If  he  Is  willing  to  in- 
sure only  20  per  cent  of  the  value  his  rate  Is  Increased  by  30 
per  cent.  If  he  is  willing  to  insure  80  per  cent  of  the  value  of 
the  property  his  rate  Is  reduced  by  15  per  cent.  The 
reasons  for  such  charges  and  credits  are  explained  In  Chap- 
ter XV.     The  schedule  also  provides  for  an  increase  of  rates 


FIRE  INSURANCE  RATES  239 

where  state  laws  are  passed  detrimental  to  the  interests  of  in- 
surance companies,  such  as  valued  policy  laws,  and  for  charges 
to  be  made  where  the  premises  are  disorderly  and  unclean.  The 
result  then  reached  is  the  rate  on  the  building. 

In  order  to  arrive  at  a  rate  upon  the  contents  of  the  build- 
ing, the  same  procedure  is  followed  up  to  and  including  the 
point  where  an  addition  is  made  for  occupancy.  At  this  point 
there  is  deducted  a  sum  equal  to  one-fourth  of  the  deficiencies 
of  the  building  and  this  is  considered  the  basis  rate  for  the 
stock.  To  this  is  added  a  figure  from  the  second  column  of  the 
occupancy  table,  previously  referred  to.  Thereafter  the  rat- 
ing process  is  very  similar  to  that  described  for  the  building. 

Where  necessary,  there  is  also  taken  into  account  the  expo- 
sure of  the  risk,  that  is  to  say,  the  character  of  the  surrounding 
buildings.  The  danger  from  fire  consists  not  only  of  the  possi- 
bility of  a  fire  starting  on  the  premises  but  also  of  fire  being 
communicated  from  adjacent  buildings.  Space  does  not  permit 
of  a  description  of  the  methods  followed  for  measuring  ex- 
posure hazard,  but  the  preceding  remarks  will  convey  the  idea 
that  it  is  not  a  haphazard  process. 

The  analytic  system, — It  will  be  remembered  that  the 
charges  in  the  Universal  Mercantile  Schedule  were  In  flat 
amounts  and  the  credits  in  percentages  of  the  basis  rate.  The 
charges  are  the  same  for  all  kinds  of  buildings  and  for  differ- 
ent periods  of  time,  while  the  credits  will,  of  course,  vary  with 
the  basis  rate.  Mr.  A.  F.  Dean  developed  the  theory  that 
while  the  elements  of  hazard  undoubtedly  bear  some  relation  to 
one  another.  It  was  Incorrect  to  attempt  to  fix  a  definite  amount 
as  the  measure  of  an  element  of  hazard.  The  result  was  the 
Analytic  Schedule,  which  Is  considerably  used  In  the  Middle 
West.  No  measurements  were  to  be  In  flat  amounts;  all  were 
to  be  percentages  of  the  basis  rate  and  all  were  to  be  In  the  form 
of  ratios.  In  this  way  it  would  be  possible  to  construct  a  sched- 
ule, all  Items  of  which  would  depend  on  the  basis  rate,  and 
underwriting  judgment  would  be  concentrated  upon  this  one 
feature.  Any  variation  In  the  basis  rate  would  affect  every  item 
of  the  schedule. 

We  find  that  instead  of  a  single  basis  rate,  the  schedule 
furnishes  a  series,  ranging  from  60  cents  up  to  $1.20,  the  un- 
derwriter being  free  to  select  the  basis  rate  which  meets  the 
needs  of  the  locality  and  the  time.^     Thus,  two  factors  arc 

^  An  example  is  given  in  Appendix  LII. 


240    INSURANCE  PRINCIPLES  AND  PRACTICES 

taken  into  consideration  which  were  not  of  any  importance  in 
the  Universal  Mercantile  system.  Cities  are  divided  into  seven 
classes,  depending  upon  the  degree  of  fire  protection  and  upon 
the  fire-fighting  facilities.  The  basis  rates  named  appear  to  be 
high,  but  this  Is  merely  because  they  are  for  a  standard  build- 
ing much  inferior  to  the  standard  prescribed  in  the  Universal 
Mercantile  Schedule.  Most  of  the  subsequent  items  are  there- 
fore charges,  few  credits  being  present.  The  charges  and  cred- 
its which  are  now  made  respectively  for  the  deficiencies  and  good 
features  of  the  building  are  all  in  percentages  as  before  stated, 
and  the  extent  of  these  Is  therefore  dependent  upon  the  basis 
rate  selected.* 

An  addition  is  made  to  the  rate  for  occupancies,  the  system 
in  this  respect  also  being  a  considerable  improvement  over  the 
Universal  Mercantile  Schedule.  The  hazards  of  occupancy 
are  very  carefully  measured,  and  the  charges  depend  upon  the 
tendency  of  an  occupancy  to  cause  fires,  and  on  the  combusti- 
bility or  burning  tendency  of  goods  involved  in  certain  occu- 
pancies; the  third  column,  used  for  rating  contents,  considers 
the  damageablllty  of  certain  kinds  of  contents  or  the  extent  to 
which  they  may  be  Injured  by  fire.  In  order  to  obtain  a  rate 
upon  contents  this  latter  column  of  the  occupancy  table^  must 
be  used,  and  the  table  is  so  arranged  that  in  finding  the  proper 
figure  to  use  for  a  rate  upon  contents,  the  basis  rate  of  the  build- 
ing, the  class  of  city,  the  location  of  the  contents,  and  the  char- 
acter of  the  contents  are  all  taken  into  consideration.  The 
schedule  also  improves  the  analysis  of  exposure  hazard,  but  this 
we  will  not  attempt  to  describe  here. 

The  experience  grading  and  rating  schedule. — Both  of  the 
schedules  above  described  have  the  same  essential  defect  from 
the  standpoint  of  the  Insured  and  the  legislator.  In  that  they  are 
not  based  upon  statistics  but  upon  underwriting  judgment. 
This  has  been  the  crux  of  the  whole  controversy  over  the  rate 
question.  Later  we  will  refer  more  In  detail  to  some  of  the 
criticisms  which  have  been  urged  against  the  fire  insurance  rat- 
ing system.  Mr.  E.  G.  Richards  has  attempted  to  devise  a 
system  which  depends  upon  the  tabulation  of  actual  experience. 
The  proposition  Is  to  have  for  every  risk  written  a  card  descrip- 
tive of  its  character  and  for  every  loss  a  card  indicating  the  same 
facts.    The  card  for  the  risks  written  would  show  the  grade  of 

*  See  sample  calculation  in  Appendix  LV  and  LVI. 
*See  Appendix  LIV. 


FIRE  INSURANCE  RATES  241 

town,  whether  the  risk  was  a  buildhig  or  contents  risk,  whether 
a  fireproof,  brick  or  frame  property,  the  grade  of  building,  and 
the  grade  of  contents.  The  loss  card  would  show  similar  data 
for  all  risks  on  which  losses  had  been  incurred.  It  would  then 
be  possible  by  use  of  a  mechanical  tabulating  machine  to  sort 
out  any  combination  of  cards  desired  and  to  find  what  the  ratio 
of  loss  to  insurance  written  had  been  for  any  combination  of  cir- 
cumstances. Taking  a  concrete  example,  we  might  find  that  for 
a  grade  5  wholesale  grocery  located  in  a  brick  building  of  the 
first  class,  with  a  grade  4  external  exposure  and  a  grade  2  inter- 
nal exposure  in  a  city  of  the  first  class,  the  ratio  of  loss  to  in- 
surance written  was  $1.45  per  $100.  Adding  to  this  an  allow- 
ance for  expenses  and  profit,  the  rate  on  a  building  of  this  type 
would  then  be,  say,  $2.59. 

This  is  the  average  rate  for  risks  of  this  kind  over  the  en- 
tire United  States.  But  the  losses  vary  between  States  and  an 
allowance  must  be  made  for  this  fact.  Suppose  that  past  ex- 
perience shows  the  losses  in  the  State  of  Pennsylvania  to  have 
been  $1.01  per  $100  of  insurance  on  all  types  of  risks,  and  a 
similar  figure  for  the  United  States  on  all  types  of  risks  to  have 
been  $1,125.  Then  losses  in  Pennsylvania  bear  the  relation 
to  losses  in  the  United  States  of  1.01  to  1.125.  If  the  rate  on 
the  particular  building  referred  to  above  is  $2.59  for  the  United 
States  as  a  whole,  the  rate  on  this  same  building  for  the  State 
of  Pennsylvania  will  be  1212  of  $2.59,  or  $2.33. 

In  reaching  the  result  many  problems  of  classification  have  to 
be  dealt  with  and  many  troublesome  details  in  the  calculation  al- 
lowed for,  so  that  the  brief  summary  given  abov^e  is  hardly  a 
fair  representation  of  the  method  involved.  For  example,  a 
schedule  based  upon  a  point  system  of  charges  and  credits  must 
be  developed  for  the  purpose  of  measuring  the  grade  of  build- 
ing and  the  internal  and  external  exposure,  a  schedule  very  sim- 
ilar in  character  to  the  Universal  and  Analytic  Schedules  pre- 
viously described.  But  the  details  have  been  worked  out  by  the 
author  of  the  system  with  sufl^cient  fulness  to  demonstrate  that 
the  plan  is  feasible,  and  aside  from  the  novel  statistical  devices 
employed  to  attain  the  result,  the  outstanding  feature  is  the 
principle  of  applying  tabulated  experience  to  the  problem  of  cal- 
culating a  fire  insurance  rate.  This  method,  if  put  into  prac- 
tice, would  probably  require  a  great  amount  of  statistical  work 
but  would  conclusively  answer  nearly  all  of  the  criticisms  which 


242    INSURANCE  PRINCIPLES  AND  PRACTICES 

have  been  directed  against  fire  insurance  rating  systems  of  the 
past.  In  other  words,  there  has  been  a  widespread  demand 
for  a  statistical  justification  of  fire  insurance  rates  and  no  other 
method  proposed  giv^es  any  promise  of  meeting  this  demand  or 
of  convincing  the  public  that  it  is  unnecessary  and  unjustifiable. 

State  regulation  of  rates. — State  regulation  of  rates  has  nat- 
urally had  their  reduction  mainly  in  view,  an  object  which  the 
legislators  have  sought  to  accomplish  in  two  ways:  (1)  By 
laws  primarily  aimed  at  the  bodies  which  make  rates  and  (2) 
by  statutes  aimed  at  the  rates  themselves.  The  most  satis- 
factory method  of  obtaining  a  picture  of  legislative  tendencies 
is  a  brief  review  of  the  history  of  regulation. 

Various  complaints  have  been  made  of  the  operations  of 
underwriters'  associations.  The  fundamental  objection  was 
one  to  which  we  have  already  briefly  referred,  that  under- 
writers failed  to  exhibit  sufficient  justification  for  rates  pro- 
mulgated. It  was  desired  that  the  companies  produce  figures 
showing  the  experience  upon  various  classes  of  risks  and  it 
has  always  been  impossible  to  convince  the  public  that  a  sta- 
tistical justification  of  rates  was  an  impossible  and  unprofit- 
able task.  The  only  attempts  to  meet  this  criticism  have  been 
( 1 )  the  theory  advanced  by  Mr.  Dean,  that  if  exorbitant 
profits  are  not  earned  as  a  whole  and  if  proper  relations  arc 
maintained  between  risks,  equity  must  result,  and  (2)  the 
E.G.R.  Schedule,  which  has  never  been  put  to  practical  use. 
While  this  objection  was  fundamental,  the  problem  of  dis- 
crimination was  more  easily  comprehended  by  the  average  in- 
dividual and  obtained  first  consideration.  There  was  a  gen- 
eral conception  that  some  classes  of  risks  were  receiving  un- 
justly low  rates,  while  other  classes  were  overcharged  to  make 
up  for  the  deficiency  in  premiums  so  created.  It  was  per- 
fectly apparent  also  that  there  was  discrimination  between 
localities.  How  could  it  be  otherwise  when  different  schedules 
and  different  rules  for  rating  risks  were  in  use  in  different  parts 
of  the  country?  The  subject  for  discussion  was,  therefore, 
not  only  whether  dwellings  or  business  properties  were  over- 
charged, but  whether  city  property  was  overcharged  for  the 
benefit  of  rural  risks  and  whether  St.  Louis  rates  were  equit- 
able as  compared  with  New  York  rates.  Discrimination  was 
also  found  between  different  kinds  of  policies,  term  rates  be- 
ing granted  on  some  risks  and  withheld  on  others.  The  worst 
form  of  discrimination  alleged  and  the  one  of  which  the  least 


FIRE  INSURANCE  RATES  243 

proof  was  presented  was  that  between  individuals.  Large 
corporations  were  said  to  have  privileges  and  rights  which 
were  inaccessible  to  the  small  property  owner.  A  third  evil 
complained  of  was  the  arbitrary  regulation  of  agents  and 
brokers,  who  were  strictly  supervised  by  underwriters'  associa- 
tions and  not  always  in  an  impartial  manner.*^  The  complaints 
briefly  classified  were  (1)  lack  of  statistical  justification  for 
rates,  (2)  discrimination,  and  (3)  arbitrary  regulation  of 
brokers  and  agents. 

As  a  result  of  these  conditions  fire  underwriters'  associa- 
tions came  to  be  generally  considered  as  evil  combinations  or 
pools  detrimental  to  public  interests,  although  they  performed 
many  legitimate  economic  functions.  The  earliest  actions 
against  them  were  at  common  law  on  the  ground  that  they  were 
against  public  welfare.  Since  the  common  law  doctrine  is  that 
contracts  in  unreasonable  restraint  of  trade  are  simply  void,  and 
unenforceable,  no  adequate  redress  could  be  obtained.  Further- 
more, it  was  required  to  show  that  the  restraint  experienced 
was  unreasonable  and  affected  an  article  of  necessity.  Insur- 
ance, however,  was  generally  held  to  be  not  a  necessity  of 
life,  although  we  have  seen  that,  under  modern  economic  con- 
ditions, it  most  assuredly  is. 

Later,  a  general  antipathy  to  trusts  arose,  followed  by  the 
passage  of  a  number  of  State  anti-trust  laws.  These  laws 
prohibited  contracts  and  agreements  in  restraint  of  "trade," 
"commerce,"  "business,"  "dealings  in  commodities,"  "prod- 
ucts," etc.,  and  the  question  had  to  be  decided  as  to  whether 
such  expressions  could  be  considered  as  including  insurance. 
The  natural  result  of  this  inquiry  was  the  decision,  in  many 
cases,  that  the  wording  of  the  acts  was  too  general  to  reach 
the  business  of  insurance. 

The  anti-trust  laws  in  some  cases  were  then  made  more 
specific,  and  amended  so  as  to  include  "mechanisms,"  "con- 
veniences," and  also  the  "price  or  premium  to  be  paid  for 
insuring  property  against  loss  or  damage  by  fire."  These 
may  be  termed  anti-compact  laws,  to  distinguish  them  from  the 
preceding  class  of  statutes.  The  only  defense  against  such 
laws  was  to  claim  that  they  violated  State  and  Federal  con- 
stitutional guarantees  of  the  right  of  contract,  equal  protec- 

*  For  a  discussion  of  the  complaints  against  fire  insurance  rating  and  under- 
writers' associations,  see  Robert  Riegei,  "Fire  Underwriters'  Associations  in  the 
United  States,"  Chronicle  Company,  Ltd.,  New  York,  1916,  and  Robert  Riegei, 
"Fire  Insurance  Rates,"  in  the  Quarterly  Journal  of  Economics,  August,  1916. 


244    INSURANCE  PRINCIPLES  AND  PRACTICES 

tion  of  the  laws  and  due  process  of  law.  In  most  of  the  cases, 
however,  the  Insurance  companies  were  unsuccessful.  The 
cooperative  making  of  rates  was  therefore  legally  impossible 
in  some  States  except  by  subterfuge. 

The  next  type  of  legislation  showed  an  entire  reversal  in 
attitude.  Whereas  the  previous  laws  had  all  claimed  that 
concerted  action  and  common  rates  were  detrimental  to  the 
public,  the  new  State  rating  laws  required  an  identical  charge 
for  the  same  risk  by  all  companies,  but  designated  the  State 
as  the  judge  of  what  the  rates  should  be.  These  laws  are  of 
three  varieties,  some  requiring  the  filing  of  rates,  others  pro- 
viding for  the  revision  of  rates  found  to  be  unfair,  and  still 
others  making  the  establishment  of  rates  a  State  function. 

We  find  at  the  present  time,  therefore,  the  following  meth- 
ods of  regulation  employed  in  various  parts  of  the  United 
States,  exclusive  of  the  general,  vague  and  inadequate  pro- 
vision that  there  shall  be  no  discrimination  in  rates. 

1.  The  Anti-Trust  Act,  generally  considered  inapplicable 
to  fire  insurance  combinations. 

2.  Anti-trust  acts  designed  to  apply  specifically  to  fire  in- 
surance and  generally  successful  in  this  respect. 

3.  Acts  requiring  the  filing  of  rates  for  public  inspection, 
some  slight  power  of  regulation  being  given  to  the  insurance 
commissioner. 

4.  Acts  permitting  insurance  companies  to  make  and  file 
rates,  but  giving  the  department  of  insurance  power  to  revise 
rates  when  found  to  be  inadequate,  unreasonable  or  discrim- 
inatory, and  to  examine  and  regulate  rate-making  associations. 

5.  Acts  placing  the  rate-making  power  in  the  hands  of  the 
State. 


Chapter  XVII 

FIRE  INSURANCE  RESERVE 

Definition  of  the  reserve. — The  reserve  at  any  given  time 
is  that  portion  of  the  premium  income  which  is  held  in  trust 
by  fire  or  casualty  insurance  companies  and  is  not  yet  earned, 
owing  to  the  fact  that  the  policy-holders  have  not  yet  received 
the  full  term  of  protection  for  which  the  premium  was  col- 
lected. It  is  the  natural  result  of  collecting  the  price  in  ad- 
vance and  delivering  the  product  in  the  future.  The  policy- 
holders pay  for  their  insurance  in  advance  for  one  year,  often 
for  three  or  five  years,  or  even  for  longer  periods;  in  fact, 
it  is  possible  to  secure  a  perpetual  policy  by  the  payment  of  one 
premium  of  sufficient  size.^  In  all  these  cases  the  company  is 
holding  prepaid  premiums  on  policies  for  various  terms,  and 
from  the  time  of  the  payment  of  the  premium  and  the  in- 
ception of  the  policy  to  its  expiration,  the  insured  has  a  de- 
creasing and  the  insurer  an  increasing  equity  in  the  premium. 
While  the  entire  premium  is  in  the  possession  of  the  insur- 
ance company,  only  that  proportion  which  is  equivalent  to  the 
expired  portion  of  the  policy  really  belongs  to  the  company. 
The  remainder  is  held  by  the  company  as  an  "unearned  pre- 
mium reserve"  or  "unearned  premium  liability,"  as  it  is  some- 
times called.  It  is  this  sum  which  is  sometimes  called  the 
"reinsurance  reserve,"  although  this  term  is  open  to  misin- 
terpretation. "Reinsurance"  implies  that  this  sum  is  nec- 
essary for  reinsuring  the  risks  and  is  held  for  that  purpose. 
But  this  is  purely  incidental,  as  we  shall  see  later,  and  is  not 
the  primary  reason  for  holding  a  reserve. 

Object  of  the  reserve. — The  reserve  from  the  standpoint  of 
the  State  may  be  regarded  as  a  necessity  for  solvency,  which 
cannot  be  determined  without  a  comparison  of  all  assets  and 
liabilities,  among  which  latter  the  paid-for  protection  must  be 
included.  As  shown  later,  however,  this  is  a  very  arbitrary 
method  of  evaluating  the  company's  contingent  liabilities. 
From  the  standpoint  of  the  insured  the  reserve  may  be  re- 
garded as  a  fund  which  enables  the  company  to  return  the  un- 
earned portion  of  the  premium  in  case  of  cancellation,  and 
provides  for  the  reinsurance  of  the  risks  with  other  companies. 

*  See  Appendix  XXIX. 

245 


246    INSURANCE  PRINCIPLES  AND  PRACTICES 

It  is  very  important  to  the  insured,  for  example,  to  know  that 
the  insurance  company  has  laid  aside  a  sufficient  sum  to  take 
care  of  all  possible  losses.  If  this  were  not  done  by  main- 
taining a  reserve  of  the  unearned  premium  the  company  would 
be  gambling  on  the  probabilities  of  loss  and  endangering  its 
future  solvency.  As  was  mentioned  before,  this  reserve  is  a 
trust  fund,  and  in  that  respect  is  very  similar  to  the  reserve 
held  by  life  insurance  companies.  In  Chapter  XIV  one  of 
the  provisions  of  the  standard  policy  discussed  was  the  can- 
cellation clause,  which  provides  that  either  the  company  or 
the  insured  may  cancel,  upon  proper  notice.  It  necessarily 
follows  that  the  company  must  always  be  in  a  position,  in 
such  cases,  to  return  the  unearned  portion  of  the  premium. 
Also,  if  the  company  desires  to  retire  from  business  and  to 
transfer  the  risks  to  another  company,  the  reinsurance  reserve 
alone  makes  this  possible.  It  is  not  to  be  inferred  from  this 
that  another  company  will  assume  these  risks  under  all  cir- 
cumstances for  exactly  the  amount  of  the  reinsurance  reserve, 
for  this  depends  on  the  character  of  the  risks  that  are  being 
carried.  If  the  underwriting  methods  of  the  retiring  com- 
pany have  been  conservative  it  may  be  that  another  company 
will  be  glad  to  assume  the  business  for  an  amount  less  than 
the  unearned  premium  reserve.  On  the  other  hand,  if  a  reck- 
less or  unfortunate  company  has  accumulated  undesirable  risks 
on  its  books  it  may  be  that  the  reserve  held  would  be  con- 
sidered insufficient.  In  fact,  when  a  company  goes  out  of 
business,  it  is  most  frequently  due  to  unsuccessful  methods  of 
underwriting,  and  the  accompaniment  is  usually  an  inadequate 
reserve.  In  these  cases  the  transfer  of  the  risks  often  requires 
a  sum  exceeding  the  reserve. 

Importance  of  the  reserve  in  regard  to  premium  payment. 
— It  is  the  maintenance  of  this  reserve  that  makes  it  possible  to 
pay  premiums  in  advance  with  safety.  The  insured  knows  that 
the  portion  of  his  premium  which  the  company  has  not  earned 
is  kept  in  a  separate  fund  and  that  he  may  secure  his  proper 
share  of  it  if  he  surrenders  his  policy  before  maturity.  Be- 
sides, the  knowledge  that  this  sum  is  subject  to  State  super- 
vision reassures  him  when  prepaying  the  premium  for  one, 
three,  or  perhaps  five  years.  Thus,  if  on  July  1st  the  company 
insured  property  for  one  year  and  collected  $26S  premium, 
on  August  1st  only  $31,  or  thirty-one  days'  premium  could  ac- 
tually be  considered  earned  by  the  company  on  that  particular 


FIRE  INSURANCE  RESERVE  247 

policy.  The  other  $334  belongs  to  the  insured.  The  com- 
pany under  this  contract  is  supposed  to  furnish  protection  for 
the  remainder  of  the  year  and  can  claim  the  premium  as  its 
own  only  in  the  proportion  that  protection  has  been  given; 
at  any  time  the  balance  in  its  possession  is  unearned  and  is 
held  for  the  benefit  of  the  policy-holder.  A  calculation  as 
exact  as  the  above,  where  the  premium  is  reduced  to  a  daily 
basis,  is  seldom  made  because  of  the  unnecessary  detail  in- 
volved. Methods  of  satisfactory  approximation  will  be  de- 
scribed later. 

Financial  importance  of  the  reserve. — From  a  financial 
standpoint  the  size  and  importance  of  the  reinsurance  reserve 
is  to  the  fire  insurance  companies  what  the  prospective  or 
legal  reserve  is  to  the  life  insurance  companies.  If  the  prob- 
ability of  fire  loss  could  be  as  accurately  forecasted  as  the 
chances  of  death,  a  similar  method  of  reserve  calculation  might 
be  employed.  Owing  to  the  comparatively  short  period  for 
which  fire  policies  are  written  (usually  for  one  year  and  sel- 
dom for  more  than  five),  the  reserve  p^r  $1,000  of  insurance 
is  never  nearly  so  large  on  the  average  as  the  reserve  of  life 
companies.  The  life  insurance  companies  in  building  up  their 
reserves  are  preparing  to  meet  the  face  of  their  policies,  know- 
ing that  death  must  occur,  but  in  fire  insurance  only  a  com- 
paratively small  number  of  policies  ever  give  rise  to  claims. 
If  life  insurance  were  written  only  on  the  term  plan  of  from 
one  to  five  years,  then  its  reserve  would  also  be  far  less  per 
$1,000  of  insurance.  Nevertheless,  the  financial  importance 
of  the  fire  insurance  companies  lies  in  the  reserve,  which  is  the 
most  important  item  in  their  business.  A  balance  sheet  of  a 
large  stock  fire  insurance  company  is  shown  below  and  a  com- 
parison of  the  unearned  premiums  (which  is  the  reinsurance 
reserve)  with  the  other  items  will  serve  to  show  the  relative 
importance  of  the  former. 

LEDGER  ASSETS 

Book  value  of  bonds $1,304,703  36 

Cash  in  company's  office 1,283   50 

Deposits  in  trust  companies  and  banks  not  on  interest 42,191  86 

Deposits  in  trust  compaqies  and  banks  on  interest 509,921  63 

Agents'    balances    representing    business    written    subsequent    to 

October  1,   1918 183,115  78 

Agents'  balances   representing  business  written  prior  to  October 

1,  1918    1,829  57 

Total     $2,043,045  70 


248    INSURANCE  PRINCIPLES  AND  PRACTICES 


NON-LEDGER  ASSETS 

Interest  accrued  on  bonds 11,926  95 

Market  value  of  bonds  over  book  value 15,011  6+ 

Gross  Assets    $2,069,984  29 


DEDUCT  ASSETS  NOT  ADMITTED 

Agents'   balances   representing  business  written 

prior  to  October  1,   1918 $1,829  57 

Market  value   of    special   deposits   in   excess   of 

corresponding  liabilities    38,834  49 

Total    40,664  06 

Total  Admitted  Assets $2,029,320  23 


LIABILITIES 

Losses  and  claims  for  losses': 

Adjusted  and  unpaid $4,634  09 

Unadjusted  plus  $13,156.97  reserve  for  losses 
incurred  prior  to  December  31  of  which  no 
notice  had  been  received  on  that  date 355,608  02 

Total    $360,242  11 

Deduct   reinsurance   in   companies   authorized 

in   New    York 195,478  08 

Net  unpaid  losses  and  claims $164,764  03 

Unearned  premiums: 

Fire $344,939  40 

Team    and    automobile 131,547  66 

Marine    13,238  23 

Total 489,725  29 

Salaries  and  miscellaneous  accounts  due  or  accrued 2,500  00 

Estimated  amount  of  taxes  hereafter  payable 30,000  00 


Liabilities,  except  capital    $686,989  32 

Capital $500,000  00 

Special  reserve   fund 250,000  00 

Guaranty   surplus   fund 250,000  00 

Surplus    342,330  91 

Surplus  to  policy-holders 1,342,330  91 


Total   $2,029,320  2 


J 


FIRE  INSURANCE  RESERVE  249 

Calculation  of  the  reserve. — The  reinsurance  reserve  has 
been  described  as  the  unearned  premium  liabihty  of  the  com- 
pany. An  accurate  application  of  this  idea  would  mean  that 
every  policy  reserve  would  be  calculated  separately,  taking  into 
consideration  the  exact  proportion  of  the  policy  term  that  had 
expired.  With  perhaps  1,000,000  policies  outstanding,  this 
would  involve  an  enormous  amount  of  work.  Therefore,  some 
method  of  approximation  had  to  be  devised,  and  an  assump- 
tion is  made  that  as  much  business  is  written  in  one  portion 
of  the  period  under  consideration  as  another. 

This,  however,  is  not  always  true  because  in  most  cases  the 
business  is  increasing,  and  the  amount  of  insurance  written  in 
December  of  a  certain  year  will  exceed  that  written  during 
the  preceding  January.  Nevertheless,  the  method  of  approxi- 
mating the  legal  reserve  as  required  by  the  several  States  is 
to  assume  that  an  equal  amount  of  insurance  is  written  in  each 
period,  which  is  the  same  as  saying  that  all  of  the  business  was 
written  in  the  middle  of  the  period.  Policies  written  January 
1st  have  expired  at  the  end  of  the  year,  while  policies  written 
December  31st  have  365  days  to  run,  the  average  for  both 
groups  being  about  182  days.  Policies  written  February  1st 
have  at  the  end  of  the  year  about  one  month  to  run,  while 
those  written  December  1st  have  eleven  months,  the  average 
for  both  groups  being  six  months.  It  follows  that  in  the  case 
of  one-year  policies  a  company  is  required  to  have  on  hand 
as  legal  reserve  only  one-half  of  the  premium  income  on  those 
policies.  For  policies  longer  than  one  year  the  requirement 
is  usually  pro  rata.  Thus,  on  all  of  the  two-year  policies 
written  the  same  year  it  would  be  assumed  that  six  months' 
premium  out  of  twenty-four  or  one-fourth  is  earned,  and  that 
at  the  end  of  the  year  the  unearned  portion  is  three-fourths  of 
the  premium  income;  on  three-year  policies,  five-sixths  of  the 
premium  would  be  a  reserve  liability;  on  four-year  policies 
seven-eighths  and  on  five-year  policies  nine-tenths,  as  shown  by 
the  table  on  p.  251 

Many  companies  for  their  own  use  divide  their  business  into 
much  shorter  periods  than  is  specified  by  law.  Their  purpose 
is  to  calculate  the  reserve  more  accurately,  since  the  smaller 
the  period  the  ^lore  accurate  the  result.  Frequently  the 
monthly  basis  is  used,  assuming  that  as  much  business  is  writ- 
ten the  first  half  of  the  month  as  the  last.     This  is  only  the 


250    INSURANCE  PRINCIPLES  AND  PRACTICES 

application  of  the  average  principle  to  a  shorter  period.  Thus, 
on  one-year  policies  written  during  May,  it  is  assumed  that  at 
the  end  of  the  month  one-twenty-fourth  of  the  annual  pre- 
mium has  been  earned,  at  the  end  of  June,  three  twenty-fourths, 
at  the  end  of  the  next  April,  twenty-three  twenty-fourths,  etc. 
The  operation  of  the  reserve  may  be  more  closely  traced  in 
the  illustration  given  below. 


7/- 

-^  y-                -^r-j                jy^j                -4/^'               s- 

Y^s 

, 

/ 

/ 

s/ 

/ 

/ 

ij 

/ 

/ 

/ 

•^  1 

t 

1 

/ 

/ 

/ 

d 

t5 

/ 

/ 

/ 

H 

V 

& 

^ 

/ 

/ 

Til 

V 

'^7 

."^ 

/ 

/ 

//o 

7/ 

0"/ 

^/ 

A 

1 

.2// 
/ 

y 

y 

1 

\             7 

/ 

1 

/       / 

r 

/& 
Z/. 

/     / 

/ 

/6      -■         ■ 

7  / 

/ 

/ 

1 

// 

/ti 

.  / 

A 

/// 

/ 

/ 

///  ■ 

/ 

/  / 

// 

4y   // 

/■o 

; /_/ 

/  / 

/ 

1^ 

■^ 

FIRE  INSURANCE  RESERVE 


251 


ILLUSTRATION  OF  RESERVE  CALCULATION 


End  of  1  ear  of 
Valuation 

Year  Policies 
Were  Written 

Term  of 
Policies 

Amount  of 
Premiums  Received 

Fraction  Earned 
During  Current  Year 

Amount  Earned 
During  Current  Year 

Fraction  Unearned 
to  Date  of 
Valuation 

Amount  Unearned 

to  Date 

(Reinsurance 

Reserve) 

1917 

1917     ■ 
Total 

1917     ■ 

1918 

Total 

( 
1917     ■ 

1918 

1919     ■ 
Total 

1  year 
3  years 
5  years 

Reserve 

1  year 
3  years 
5  years 

Unearned 

1  year 

2  years 

3  years 
5  years 

Unearned 

Reserve 

1  year 
3  years 
5  years 

Unearned 

1  year 

2  years 

3  years 
5  years 

Unearned 

1  year 

2  years 

3  years 

4  years 

5  years 

Unearned 
Reserve 

i?40,000 
18,000 
10,000 

necessary 

40,000 
18,000 
10,000 

Premium 

60,000 
20,000 
24,000 
20,000 

Premium 

necessary 

40,000 
18,000 
10,000 

Premium 

60,000 
20,000 
24,000 
20,000 

Premium 

80,000 
40,000 
42,000 
24.000 
40,000 

Premium 

necessary 

V2 
% 

}io 
at  end  of 

% 

1/ 

710 
on  1917 

% 

Ko 

on  1918 
at  end  of 

J?20,000 
3,000 
1,000 

Year  1917 

20,000 
6,000 
2,000 

business 

y> 

% 
%0 

}?20,000 

15,000 

9,000 

44,000 

none 
% 

Ko 

t 

none 
9,000 
7,000 

16,000 

1918    ^ 

30,000 
5,000 
4,000 
2,000 

business.  . 

V2 

% 

/lO 

30,000 
15,000 
20,000 
18,000 

83,000 

Year  1918 

99  000 

none 

none 

■ 

Ko 

on  1917 

% 

710 

on  1918 

M 

% 

}io 
on  1919 
at  end  of 

6,000 
2,000 

business.  . 

3,000 
5,000 

8,000 

30,000 

10,000 

8,000 

4,000 

business.  . 

none 

Ko 

1919    > 

none 

5,000 

12,000 

14,000 

31,000 

40,000 

10,000 

7,000 

3,000 

4,000 

business.  . 

% 
Ko 

* 

40,000 
30,000 
35,000 
21,000 
36,000 

162,000 

Year  1919 

?20 1,000 

252    INSURANCE  PRINCIPLES  AND  PRACTICES 

It  is  here  assumed  that  the  company  began  business  in  1917 
and  during  the  year  received  a  premium  income  of  $40,000  on 
one-year  policies,  $18,000  on  three-year  policies  and  $10,000 
on  five-year  policies.  The  second  year  of  business,  1918,  the 
company  received  $60,000  on  new  one-year  policies,  $20,000 
on  new  two-year  policies,  $24,000  on  new  three-year  policies, 
and  $20,000  on  new  five-year  policies.  The  third  year  on 
new  policies  written  it  received  $80,000  on  one-year  policies, 
$40,000  on  two-year  policies,  $42,000  on  three-year  policies, 
$24,000  on  four-year  policies,  and  $40,000  on  five-year  poli- 
cies. Applying  the  table  on  page  251,  we  find  that  in  1917 
the  company  earned  one-half  of  the  premiums  received  for 
one-year  policies  or  $20,000,  one-sixth  of  the  premiums  on  its 
three-year  policies  or  $30,000,  and  one-tenth  or  $1,000  on  the 
five-year  policies.  Deducting  this  from  premiums  originally 
collected  leaves  an  unearned  premium  of  $20,000  on  the  one- 
year  policies,  $15,000  on  the  three-year  policies,  and  $9,000 
on  five-year  policies,  or  a  total  of  $44,000  on  hand  at  the  end 
of  the  first  year's  business. 

In  the  year  1918  the  company  earned  the  remaining  one- 
half  of  the  premium  on  the  one-year  policies  written  in  1917, 
or  $20,000,  on  the  three-year  business  written  in  1917,  it 
earned  two-sixths  or  $6,000,  and  on  the  five-year  business  two- 
tenths  or  $2,000,  which,  considering  the  premiums  previously 
earned,  leaves  at  the  end  of  the  second  year  an  unearned  pre- 
mium of  $16,000  on  the  business  written  during  the  first  year 
of  their  existence.  During  the  year  1918,  however,  the  com- 
pany has  written  some  new  policies.  On  the  one-year  poli- 
cies it  earned  $30,000,  on  the  two-year  policies  $5,000,  on  the 
three-year  policies  $4,000,  on  the  five-year  policies  $2,000, 
making  a  total  of  $83,000  as  the  unearned  premium  on  the 
current  year's  business.  This,  added  to  the  $16,000  from  the 
previous  year's  business,  makes  a  grand  total  of  $99,000, 
which  should  be  held  as  the  unearned  premium  reserve  at  the 
end  of  the  year  1918. 

In  the  year  1919,  we  find  that  on  the  three-year  policies 
written  in  1917,  two-sixths  was  earned  or  $6,000,  on  the  five- 
year  policies  written  that  year  two-tenths  was  earned  or  $2,000, 
leaving  $8,000  as  yet  unearned  on  policies  written  the  first 
year.  On  the  1918  business  the  other  one-half  of  the  $60,000 
on  one-year  policies  written  in  1917  has  been  earned;  on  the 
two-year  policies  written   in    1918,   one-half   of  $20,000   or 


FIRE  INSURANCE  RESERVE  253 

$10,000  was  earned  during  the  current  year;  two-sixths  was 
earned  on  the  three-year  policies  or  $8,000;  and  two-tenths 
on  the  five-year  policies  or  $4,000,  which  left  at  the  end  of 
1919  an  unearned  premium  of  $31,000  on  the  business  written 
in  the  second  year.  During  the  current  year  one-half  of  the 
premium  Income  on  one-year  policies  or  $40,000  was  earned; 
on  the  two-year  policies  one-fourth  or  $10,000  was  earned; 
on  the  three-year  policies  one-sixth  or  $7,000;  on  four-year 
policies  one-eighth  or  $3,000;  on  five-year  policies  one-tenth 
or  $4,000.  This  made  a  reserve  liability  of  $162,000  for  the 
1919  business,  which,  added  to  the  unearned  premiums  of 
$31,000  for  1918  business  and  $8,000  for  1917  business, 
made  a  total  unearned  premium  liability  of  $201,000  at  the 
close  of  business  on  December  31st,  1919.  This  same  opera- 
tion is  repeated  year  after  year,  always  carrying  over  the  un- 
expired portions  of  the  policies  written  in  previous  years,  with 
the  results  indicated  by  the  table. 

State  legislation  relating  to  the  reserve. — It  has  been  ex- 
plained that  the  reserve  in  fire  insurance  is  a  trust  fund  and, 
like  every  fiduciary  relationship,  is  subject  to  State  regulation. 
Knowing  that  the  future  depends  on  the  solvency  of  the  com- 
pany, precautions  are  taken  to  see  that  the  premiums  paid  in 
advance  are  properly  safeguarded.  The  amount  which  a  com- 
pany is  usually  legally  required  to  hold  is  calculated  on  page 
251.  To  quote  a  typical  State  Insurance  law  in  this  connection, 
the  Insurance  Commissioner  Is  directed  as  follows:  "In  de- 
termining the  liabHities  of  a  fire  insurance  company,  charge  the 
Insurance  company  50  per  cent  of  the  premiums  written  in 
their  policies  upon  all  unexpired  risks  that  have  one  year,  or 
less  than  one  year,  to  run,  and  a  pro  rata  of  all  premiums 
on  risks  having  more  than  one  year  to  run;  on  perpetual  poli- 
cies, charge  the  deposit  received  less  a  surrender  charge  of  not 
exceeding  10  per  cent  thereof."  In  regard  to  perpetual  poli- 
cies it  should  be  mentioned  that  the  company  assumes  that 
sufficient  interest  will  be  earned  on  the  premium  paid  to  be 
equivalent  to  the  regular  term  rate.  Therefore,  practically 
the  entire  Initial  premium  should  at  all  times  be  intact.  The 
accuracy  of  the  above  calculation  in  regard  to  term  policies 
has  been  discussed  earlier  In  the  chapter.  It  might  be  added 
here,  however,  that  great  difficulty  confronts  the  State  when 
any  other  assumption  Is  used,  since  there  Is  nothing  in  fire  in- 
surance comparable  to  the  American  Experience  Table  used 


254    INSURANCE  PRINCIPLES  AND  PRACTICES 

for  life  insurance  reserve  evaluation.  It  is  assumed  that  the 
underwriting  methods  of  the  company  are  sufficiently  safe  and 
the  premiums  charged  have  been  calculated  with  a  view  to 
making  a  profit.  Therefore  a  reserve  equal  to  the  unearned 
premium  liability  is  generally  conceded  to  be  sufficient  when 
calculated  in  the  above  manner.  This,  as  we  have  seen,  may 
or  may  not  be  true,  depending  on  the  character  of  the  risks 
and  the  distribution  of  business  throughout  the  year. 

It  has  even  been  argued  that  in  many  cases  this  method  of 
ascertaining  legal  reserve  requirements  works  an  undue  hard- 
ship on  new  and  small  companies.  We  have  seen  in  Chapter 
VI  that  while  life  companies  are  allowed  to  evaluate  their  poli- 
cies in  various  ways,  such  as  the  "preliminary  term  plan,"  the 
"modified  preliminary  term  plan,"  etc.,  to  enable  them  to  meet 
the  early  incidence  of  expense,  this  privilege  is  denied  to  fire 
insurance  companies.  To  demonstrate  the  effect  of  this  on  a 
new  company,  let  us  assume  that  a  new  fire  insurance  company 
with  a  capital  of  $100,000  began  on  January  1st,  1920.  Dur- 
ing the  year  the  policy  premiums  collected  on  one-year  poli- 
cies amounted  to  $100,000.  Suppose  that  the  acquisition  ex- 
pense was  $30,000  (which  would  be  quite  low  for  the  first 
year  of  business),  and  that  the  claims  paid  or  accrued 
amounted  to  $45,000  ;  there  would  remain  a  surplus  of  $25,000 
on  hand  to  be  applied  as  the  unearned  premium  reserve.  But 
the  State  law  specified  that  the  company  should  have  had  one- 
half  of  its  premium  income  on  one-year  policies,  or  $50,000, 
in  reserve;  since  they  had  only  $25,000,  their  capital  was 
impaired  to  the  extent  of  $25,000.  Originally  only  $100,000, 
it  is  now  reduced  to  $75,000.  So  even  where  the  law 
allows  a  20  per  cent  impairment  of  capital  this  company 
would  not  have  met  the  legal  requirements.  From  this  it  can 
be  seen  that  a  reserve  requirement  may  hamper  the  operation 
of  a  young  fire  insurance  company  to  a  very  great  extent. 
There  is  no  scientific  method  of  ascertaining  the  reserve  ex- 
cept by  calculating  the  present  value  of  future  losses,  a  method 
which  is  impracticable  because  of  the  great  diversity  in  classes 
of  risks  and  the  uncertainty  of  estimating  the  probability  of 
future  losses,  an  uncertainty  far  greater  than  in  life  insurance. 
In  addition  the  frequent  but  irregular  occurrence  of  great  con- 
flagrations makes  additional  precautions  necessary;  but  fatal 
epidemics,  such  as  the  recent  wave  of  influenza,  rarely  dis- 
turb the  even  course  of  human  mortality. 


FIRE  INSURANCE  RESERVE  255 

To  further  stabilize  insurance  companies  and  prevent  Insol- 
vencies, the  States  frequently  specify  the  types  of  securities  in 
which  the  reserve  may  be  Invested,  enforcing  restrictions  very 
similar  to  those  for  life  insurance  companies,  as  outlined  in 
Chapter  VII.  Besides,  It  is  frequently  required  that  both 
domestic  and  foreign  companies  make  a  deposit  of  approved 
securities  with  the  State  for  the  purpose  of  guaranteeing  sol- 
vency. This  sum,  however,  is  usually  inadequate  as  a  reserve, 
and  does  not  approach  the  unearned  premium  liability.  A  more 
stringent  requirement  than  a  "special  deposit"  in  the  form  of  a 
flat  sum  Is  one  which  requires  approved  securities  to  an  amount 
equal  to  the  unearned  premium  liability.  This  serves  the  double 
purpose  of  subjecting  the  assets  to  close  scrutiny  and  at  the  same 
time  preventing  fraudulent  manipulation  by  placing  this  "trust 
fund"  beyond  the  reach  of  the  individual  officers  of  the  company. 

It  should  be  mentioned  that  the  above  applies  principally 
to  the  stock  companies,  mutuals  usually  being  allowed  to  reg- 
ulate the  reserves  as  they  see  fit  and  make  assessments  when 
found  necessary.  The  different  conditions  of  organization  and 
the  relative  merits  of  these  two  types  of  companies  have  been 
discussed  elsewhere. 


Chapter  XVIII 

SETTLEMENT  OF  LOSSES 

Classification  of  provisions  applying  to  loss  settlements. — 
The  policy  provisions  which  remain  for  discussion  apply  after 
a  loss  has  taken  place.  They  may  be  divided  into  four  groups: 
(1)  those  referring  to  the  preservation  of  the  property,  (2) 
those  dealing  with  the  proof  of  the  amount  lost,  (3)  those 
providing  for  the  settlement  of  disagreements,  (4)  those  de- 
termining the  extent  of  the  company's  net  liability.  With 
regard  to  the  requirements  made  of  the  insured,  the  courts 
have  been  lenient  when  they  apply  after  a  fire  has  occurred, 
while  the  requirements  before  a  loss  have  been  regarded  as 
more  important  because  they  may  serve  to  prevent  a  fire.  We 
will  discuss  the  policy  provisions  in  the  order  in  which  they 
would  naturally  come  into  play  In  the  course  of  the  adjust- 
ment of  a  loss. 

Provisions  referring  to  the  preservation  of  property. — The 
policy  requires  that  "the  Insured  shall  give  immediate  notice 
to  this  company  of  any  loss  or  damage."^  That  the  Insurer 
Is  entitled  to  notice  of  this  Important  event  is  clear,  inasmuch 
as  it  enables  him  to  take  action  to  reduce  the  loss  by  protect- 
ing the  property,  to  Investigate  the  cause  of  the  fire  and  better 
to  determine  his  liability.  Without  such  notice  it  Is  usually 
held  that  he  is  released  from  liability.  But  "immediate  notice" 
is  not  always  the  prompt  action  which  might  be  supposed. 
While  it  would  be  unsafe  for  an  insured  to  presume  upon  the 
leniency  of  the  courts,  it  has  been  held  that  immediate  notice 
is  notice  given  within  a  reasonable  time  and  that  a  delay  of 
thirty  days  may  be  justifiable  under  certain  circumstances.  In 
another  case  seven  days  has  been  held  to  be  an  unreasonable^ 
delay,  sufficient  to  release  the  company  from  liability. 

The  next  action  required  of  the  insured  Is  to  "protect  the 
property  from  further  damage."^  For  such  further  damage 
resulting  from  neglect  the  insurance  company  Is  not  liable,  ac- 

*  Appendix  XXX,  lines  126-128. 
'Appendix  XXX,  lines  128  and  129. 

256 


SETTLEMENT  OF  LOSSES  257 

cording  to  several  decisions,  since  the  fire  policy  Is  not  designed 
to  protect  the  insured  against  his  own  negligence  or  careless- 
ness, but  only  against  the  danger  of  loss  by  fire.  The  cost  of 
protecting  the  property  Is  naturally  considered  a  part  of  the 
loss. 

After  this  has  been  done  the  Insured  is  required  to  "forth- 
with separate  the  damaged  and  undamaged  personal  property 
and  put  it  In  the  best  possible  order. "^  This  tends  to  pro- 
tect such  goods  as  are  undamaged  and  enables  the  representa- 
tive of  the  company  to  make  an  examination  of  the  property 
and  to  take  necessary  measures  for  further  protection.  The 
insured  Is  not  required  by  this  provision  to  restore  the  goods 
to  the  same  conditions  as  existed  before  the  fire. 

Estimation  of  amount  of  loss. — The  next  few  requirements 
are  designed  to  enable  an  estimate  of  the  amount  of  loss. 
The  Insured  Is  required  to  "furnish  a  complete  Inventory  of 
the  destroyed,  damaged  and  undamaged  property,  stating  the 
quantity  and  cost  of  each  article  and  the  amount  claimed  there- 
on."* This  Is  In  the  nature  of  a  preliminary  proof  of  loss. 
This  provision  Is  not  a  mere  direction  to  the  Insured  of  what 
his  action  should  be,  but  is  essential  to  enable  him  to  claim  from 
the  company. 

"And  the  Insured  shall  within  sixty  days  after  the  fire,  un- 
less such  time  Is  extended  In  writing  by  this  company,  render 
to  this  company  a  proof  of  loss  signed  and  sworn  to  by  the 
insured,  stating  the  knowledge  and  belief  of  the  insured  as 
to  the  following:  (a)  the  time  and  origin  of  the  fire;  (b) 
the  interest  of  the  Insured;  (c)  and  of  all  others  in  the  prop- 
erty; (d)  the  cash  value  of  each  Item  thereof;  (e)  and  the 
amount  of  loss  or  damage  thereto;  (f)  all  encumbrances 
thereon;  (g)  all  other  contracts  of  Insurance  whether  valid 
or  not,  covering  any  of  said  property;  (h)  any  changes  In  the 
title,  use,  occupation,  possession,  or  exposure  of  said  property 
since  the  issuing  of  this  policy;  (I)  by  whom  and  for  what 
purpose  any  building  herein  described  and  the  several  parts 
thereof  were  occupied  at  the  time  of  the  fire."^  We  might 
call  attention  here  to  the  policy  provision  previously  referred 
to  regarding  false  swearing  and  fraud,''  which  is  not  lightly 

'Appendix  XXX,  lines  129  and  130. 

'Appendix  XXX,  lines  130-133. 

=  Appendix  XXX,  lines  133-145;  and  Appendix  XL VI. 

"Appendix  XXX,  lines  1-6. 


258    INSURANCE  PRINCIPLES  AND  PRACTICES 

regarded  by  the  courts  in  the  proof  of  loss,  whatever  may  be 
the  attitude  toward  it  at  other  times.  The  object  of  the  proof 
of  loss  is  to  enable  the  insurance  company  to  determine  whether 
or  not  it  will  assume  liability  for  the  loss  and  to  what  extent. 
A  time  limit  is  placed  upon  furnishing  the  proof  of  loss,  but 
this  has  been  sometimes  leniently  construed  by  the  courts.  A 
form  such  as  is  shown  in  the  appendices  is  furnished  to  the 
insured  for  the  purpose  of  making  a  proof  of  loss.^  In 
several  cases  it  has  been  held  that  these  requirements  are  in- 
operative as  regards  a  mortgagee  because  the  company's  con- 
tract with  him  is  held  to  be  a  new  contract.  If  the  owner  does 
not  furnish  a  proof  of  loss  the  mortgagee  may  do  so  for  the 
protection  of  his  interest.  The  new  standard  policy  provides 
that  "upon  failure  of  the  insured  to  render  proof  of  loss,  such 
mortgagee  shall  as  if  named  as  insured  hereunder,  but  within 
sixty  days  after  notice  of  such  failure,  render  proof  of  loss 
and  shall  be  subject  to  the  provisions  hereof  as  to  appraisal 
and  times  of  payment  and  of  bringing  suit."^ 

"And  shall  furnish  a  copy  of  all  the  descriptions  and  sched- 
ules in  all  policies  and  if  required,  verified  plans  and  specifi- 
cations of  any  building,  fixtures  or  machinery  destroyed  or 
damaged."^  This  is  inserted  to  assist  the  company  in  identi- 
fying the  property  destroyed  and  in  estimating  the  value  of 
such  property.  In  many  cases  this  saves  the  time  which 
would  be  necessary  to  examine  the  physical  property  itself. 
"The  insured  as  often  as  may  be  reasonably  required  shall 
exhibit  to  any  person  designated  by  this  Company  all  that 
remains  of  any  property  herein  described  and  submit  to  exam- 
inations under  oath  by  any  person  named  by  this  company  and 
subscribe  the  same."^'*  This  enables  the  company  to  protect 
itself  against  fraud  or  the  illegal  appropriation  of  any  of  the 
woods  insured.  For  the  same  reason  the  insured  "as  often 
as  may  be  reasonably  required,  shall  produce  for  examination 
all  books  of  account,  bills,  invoices,  and  other  vouchers  or 
certified  copies  thereof,  if  originals  be  lost,  at  such  reasonable 
time  and  place  as  may  be  designated  by  this  company  or  its 
representatives  and  shall  permit  extracts  and  copies  thereof 
to  be  madc."^^     These  requirements  are  important  to  the  com- 

'  See  Appendix  XLVI. 
'Appendix  XXX,  lines  112-116. 
•Appendix  XXX,  lines  145-148. 
"Appendix  XXX,  lines  148-153. 
"Appendix  XXX,   lines  153-158. 


SETTLEMENT  OF  LOSSES  259 

pany  and  have  generally  been  given  effect  by  th^  courts,  but 
the  companies,  to  insure  the  production  of  books  and  papers, 
have  sometimes  used  a  so-called  Iron-safe  clause,  whereby  the 
Insured  was  required  among  other  things  to  keep  books  and 
papers  in  a  fireproof  safe  at  night  on  penalty  of  voiding  the 
contract,  but  this  was  so  leniently  regarded  by  the  courts  as 
to  make  its  effect  ludicrous.  The  time  and  place  of  examina- 
tion of  the  insured  and  of  his  books  and  papers  must  be  rea- 
sonable. The  place  of  the  fire  has  been  held  a  reasonable 
place. 

Agreement  and  appraisal. — We  have  now  seen  what  the  in- 
sured is  required  to  do  after  a  loss  occurs.  When  the  insured 
has  complleci  with  these  regulations,  a  special  agent  of  the  in- 
surance company  under  the  title  of  an  adjuster  and  the  in- 
sured or  his  representative  must  endeavor  to  settle  upon  the 
amount  to  which  the  insured  is  entitled.  If  the  two  parties 
agree  the  policy  provides  that  "the  amount  of  loss  or  damage 
for  which  this  company  may  be  liable  shall  be  payable  sixty 
days  after  proof  of  loss  as  herein  provided  is  received  by  this 
company  and  ascertainment  of  the  loss  or  damage  is  made 
either  by  agreement  between  the  insured  and  this  company, 
expressed  in  writing  or  by  the  filing  with  this  company  of  an 
award  as  herein  provided. "^^  As  previously  stated,  the  In- 
sured cannot  under  a  fire  policy  abandon  the  property  and 
claim  the  full  amount  of  Insurance. ^^  If  the  parties  cannot 
agree  upon  the  amount  of  loss  and  damage  an  appraisal  is 
necessary  as  provided  for  In  the  policy. 

"In  case  the  Insured  and  this  Company  shall  fall  to  agree 
as  to  the  amount  of  loss  or  damage,  each  shall,  on  the  written 
demand  of  either,  select  a  competent  and  disinterested  ap- 
praiser. The  appraisers  shall  first  select  a  competent  and  dis- 
interested umpire;  and  failing  for  fifteen  days  to  agree  upon 
such  umpire  then,  on  request  of  the  insured  or  this  Company, 
such  umpire  shall  be  selected  by  a  judge  of  a  court  of  record 
In  the  State  In  which  the  property  insured  Is  located.  The  ap- 
praisers shall  then  appraise  the  loss  and  damage,  stating  sep- 
arately sound  value  and  loss  or  damage  to  each  Item;  and 
failing  to  agree,  shall  submit  their  differences  only,  to  the  um- 
pire. An  award  in  writing,  so  Itemized,  of  any  two  when  filed 
with  this  Company  shall  determine  the  amount  of  sound  value 

"Appendix  XXX,  lines  185-191. 
"Appendix  XXX,  lines  182-184. 


260    INSURANCE  PRINCIPLES  AND  PRACTICES 

and  loss  oi*  damage.  Each  appraiser  shall  be  paid  by  the 
party  selecting  him  and  the  expenses  of  appraisal  and  umpire 
shall  be  paid  by  the  parties  equally.""  The  demand  for  ap- 
praisal cannot  be  made  until  the  insured  has  submitted  his 
claim  to  the  insurance  company  and  the  company  has  made 
an  unsuccessful  offer  of  settlement.  Either  party  may  then 
require  an  appraisal,  which  does  not  establish  the  liability  of 
the  company  but  merely  the  amount  of  liability  if  any  exists. 
The  umpire  acquires  the  right  to  act  only  after  the  appraisers 
have  disagreed.  The  appraisal  is  concerned  largely  with  mat- 
ters of  fact.  Whether  the  loss  should  be  settled  on  the  basis 
of  market  value  or  on  the  cost  of  reproduction  would  hardly 
be  a  pertinent  question.  Nor  can  the  demand  for  an  ap- 
praisal be  made  conditional  upon  some  other  thing  being  done 
by  the  insured  or  by  the  company,  for  it  then  loses  its  value, 
as,  for  Instance,  where  it  was  required  that  tobacco  should  be 
sold  at  auction  and  the  sale  price  introduced  as  evidence  of  the 
value.  The  parties  usually  sign  an  appraisal  agreement^^  in 
which  the  appraisers  are  named  and  declare  themselves  to  be 
disinterested  parties,  although  no  such  written  agreement  is 
required.  Whether  an  appraiser  Is  competent  as  required  by 
the  provision  depends  upon  what  he  has  to  do.  In  many 
cases  a  professional  appraiser  is  selected  by  the  company  or 
the  insured,  and  the  question  then  arises  as  to  whether  such 
a  party  is  disinterested  as  the  policy  demands.  The  mere 
fact  that  he  has  previously  adjusted  losses  for  the  same  com- 
pany would  not  prove  that  he  was  an  interested  party  but 
might  be  some  evidence  to  this  effect. 

The  courts  of  nearly  every  State  have  held  that  if  either 
party  requests  an  appraisal  such  is  necessary  before  a  suit 
can  be  maintained  and  a  recovery  had  upon  the  policy.  In 
Pennsylvania  and  Nebraska,  however,  this  agreement  to  ap- 
praise Is  held  to  be  revocable  by  either  party  and  the  bringing 
of  an  action  in  court  constitutes  such  a  revocation.  The  par- 
ties are  not  permitted,  in  the  language  of  these  courts,  to  "oust 
the  courts  of  their  general  jurisdiction."  In  those  States 
where  a  valued  policy  law  Is  In  force,  there  is  no  provision 
for  an  appraisal  and  if  one  is  obtained,  its  result  will  not  be  en- 
forced by  the  courts. 


"Appendix  XXX,  lines  159-175. 
*'  Appendix  XLV. 


SETTLEMENT  OF  LOSSES  261 

Suits. — If  the  question  of  the  liability  of  the  company  is  in- 
volved, the  case  may  be  brought  into  court  regardless  of  the 
action  of  appraisers.  The  policy  provides  that  "No  suit  or 
action  on  this  policy,  for  the  recovery  of  any  claim,  shall  be 
sustainable  in  any  court  of  law  or  equity  unless  all  the  re- 
quirements of  this  policy  shall  have  been  complied  with,  nor 
unless  commenced  within  twelve  months  next  after  the  fire,"^^ 
The  object  is  to  prevent  unreasonable  delay  upon  the  part  of 
either  the  company  or  the  insured  which  may  make  the  de- 
termination of  the  rights  of  the  parties  more  difiBcult. 

Net  liability  of  the  company. — The  next  question  which 
presents  itself  after  the  liability  of  the  company  has  been 
proved  is  the  net  amount  for  which  the  company  is  liable, 
In  this  connection  it  must  be  borne  in  mind  that  subrogation  Is 
a  settled  principle  of  insurance.  The  policy  also  specifically 
provides  that  "This  Company  may  require  from  the  insured 
an  assignment  of  all  right  of  recovery  against  any  party  for 
loss  or  damage  to  the  extent  that  payment  therefor  is  made 
by  this  Company,"^^  and  "On  payment  to  such  mortgagee  of 
any  sum  for  loss  or  damage  hereunder,  if  this  Company  shall 
claim  that  as  to  the  mortgagor  or  owner,  no  liability  existed, 
it  shall,  to  the  extent  of  such  payment  be  subrogated  to  the 
mortgagee's  right  of  recovery  and  claim  upon  the  collateral 
of  the  mortgage  debt,  but  without  impairing  the  mortgagee's 
right  to  sue,  or  it  may  pay  the  mortgage  debt  and  require  an 
assignment  thereof  and  of  the  mortgage. "^^  The  right  of 
subrogation  may  be  defined  as  the  right  of  an  insurance  com- 
pany, after  paying  a  loss  to  the  insured,  to  acquire  all  rights 
possessed  by  the  insured  against  third  parties  which  are  re- 
lated to  such  loss.  These  rights  may  be  legal,  contractual  or 
equitable. 

One  very  common  right  Is  the  right  of  a  mortgagee  who 
is  insured  under  a  separate  policy  to  collect  his  debt  from  the 
mortgagor.  Suppose  a  property  worth  $10,000  serves  as  se- 
curity for  a  debt  of  $8,000  and  that  a  loss  of  $4,000  takes 
place.  Naturally,  since  the  security  of  the  mortgagee  has 
been  decreased  by  nearly  one-half,  he  expects  to  be  and  is 
reimbursed  by  the  insurance  company.  But  the  mortgagee  still 
has  the  right  to  collect  his  debt  from  the  debtor,  and  to  permit 

"Appendix  XXX,  lines  192-196. 
"Appendix  XXX,  lines  197-200. 
"Appendix  XXX,  lines  116-123. 


262    INSURANCE  PRINCIPLES  AND  PRACTICES 

him  to  retain  this  right  would  be  to  permit  him  to  collect  the 
same  debt  twice.  Therefore  by  the  principle  of  subrogation 
the  right  to  the  debt  is  transferred  to  the  insurance  company 
which  has  paid  the  loss.  A  similar  situation  arises  where  the 
mortgagor  and  mortgagee  are  protected  by  a  policy  issued 
to  the  mortgagor  with  the  endorsement  of  a  mortgage  clause 
and  the  policy  becomes  void  as  to  the  mortgagor,  but  is  in  full 
force  as  regards  the  mortgagee.  The  company  makes  pay- 
ment to  the  mortgagee  to  the  amount  of  the  damage  and 
receives  an  assignment  of  his  rights  to  that  extent,  or  pays 
the  full  amount  of  the  debt  and  receives  an  assignment  of 
the  entire  debt  and  mortgage.  The  policy  provides  that  rights 
of  the  mortgagee  are  not  to  be  prejudiced  by  this  method  of 
settlement. 

Another  example  of  the  right  of  subrogation  is  found  where 
the  fire  is  caused  by  the  negligence  of  a  third  party,  for  which 
negligence  the  party  whose  property  is  damaged  may  recover 
at  law.  If  the  person  damaged  recovers  from  the  insurance 
company,  however,  the  right  to  recover  from  the  negligent 
third  party  passes  to  the  insurance  company.  A  policy  of 
insurance  issued  to  a  tobacco  company  covered,  among  other 
items,  several  thousand  dollars  worth  of  unused  internal  rev- 
enue stamps.  These,  with  other  property,  were  lost  and  the 
insurance  company  paid  the  loss.  Under  United  States'  stat- 
utes the  stamps  were  redeemable  from  the  United  States  Gov- 
ernment, and  the  underwriters,  having  paid  the  loss,  claimed 
and  received  reimbursement  from  the  Government. 

In  many  cases  the  insured  has  several  policies  covering  the 
same  interest  in  the  same  property.  In  case  of  a  large  risk, 
in  fact,  he  is  often  compelled  to  seek  several  companies  in  order 
to  secure  full  protection.  To  cover  this  situation  the  policy 
provides  that  "This  Company  shall  not  be  liable  for  a  greater 
proportion  of  any  loss  or  damage  than  the  amount  hereby 
insured  shall  bear  to  the  whole  insurance  covering  the  prop- 
erty, whether  valid  or  not  and  whether  collectible  or  not."'* 
Applying  this  to  a  specific  case,  let  us  assume  that  company 
"A"  insures  a  $50,000  property  for  $20,000,  and  company 
"B"  insures  the  same  property  for  $10,000.  A  loss  of  $3,000 
occurs.  The  above  provision  of  the  contract  makes  company 
"A"  liable  for  the  proportion  that  its  insurance  ($20,000) 
bears  to  the  total  insurance  ($30,000)  or  two-thirds  of  the  loss 

"Appendix  XXX,  lines  101-105. 


SETTLEMENT  OF  LOSSES  263 

of  $3,000,  that  is,  a  liability  of  $2,000.  Company  "B"  is 
liable  for  the  proportion  its  insurance  ($10,000)  bears  to  the 
total  insurance  ($30,000)  or  one-third,  that  is,  $1,000. 

Where  the  policies  issued  by  "A"  and  "B"  arc  concurrent, 
that  is  to  say,  where  the  provisions  of  the  policies  are  identical, 
the  application  of  the  principle  is  simple.  But  there  are  some 
cases  where  the  policy  provisions  differ  and  it  consequently 
becomes  a  difficult  matter  to  determine  the  amount  of  the  total 
insurance.  The  policies  may  differ  because  the  properties 
covered  are  in  different  locations,  because  the  descriptions  of 
the  insured  articles  vary,  because  the  interests  covered  are  not 
identical,  or  because  one  policy  contains  clauses  or  endorse- 
ments not  on  the  other.  This  is  a  situation  to  be  avoided  by 
both  the  insured  and  the  company  because  it  results  in  delay 
in  the  payment  of  losses  and  frequently  involves  complicated 
law  cases.  The  most  frequent  case  of  non-concurrency  is 
where  one  policy  is  a  specific  policy  covering  one  item,  while 
another  policy  is  a  general  policy  covering  many  items,  in- 
cluding the  one  covered  by  the  specific  policy.  Wc  will  take 
a  relatively  simple  case  of  this  kind  and  apply  to  it  a  rela- 
tively simple  rule,  as  an  illustration  of  the  difficulties  of  ad- 
justment. 

Let  us  suppose  that  an  owner  has  a  stock  of  goods  consist- 
ing of  the  following. 

Falue 

Furniture $3,000 

Jewelry 500 

Wearing  apparel 500 

Total $4,000 

The  losses  by  fire  on  these  articles  are  as  follows: 

Loss 

Furniture $1,000 

Jewelry 500 

Wearing  apparel 500 

Total $2,000 

Company  "G"  had  insured  all  these  items  under  a  general 
policy  for  $1,000  and  company  "S"  had  insured  the  furniture 
alone  for  $1,000. 

Suppose  the  principle  is  adopted  that  the  general  policy  ap- 
plies to  each  of  the  specific  items  in  the  proportion  that  the 


264    INSURANCE  PRINCIPLES  AND  PRACTICES 

value  of  the  item  bears  to  the  value  of  all  the  property  in- 
sured. Then  the  insurance  on  the  various  items  is  as  fol- 
lows : — 

Co.  "G"  Co.  "S"  Total 

Furniture   [30/40  of  $l,000l  =  $750  $1,000  $1,750 

Jewelry     ]    5/40  of     1,000  V=    125  0  125 

W^earing  Apparel   . .  [  5/40  of     l,000j  =    125  0  125 

Total   $1,000  $1,000  $2,000 

The  loss  on  furniture  was  $1,000  and  the  total  insurance 
was  $1,750  of  which  company  "G"  insured  $750  and  company 
"S"  $1,000.  "G"  is  therefore  liable  for  75-175  of  $1,000 
loss  or  $428.57.  "S"  is  liable  for  100-175  of  $1,000  or 
$571.43.  The  loss  on  the  other  items  (jewelry  and  wearing 
apparel)  was  $1,000  and  this  was  only  covered  by  the  general 
policy  of  $1,000  in  company  "G."  But  of  that  general  policy, 
only  $250  applied  to  these  two  items  and  this  constitutes 
all  that  the  insured  can  recover  of  his  loss  on  these  two  items. 
The  total  loss  is  therefore  $2,000,  the  total  insurance  $2,000, 
and  he  recovers  $1,250. 

Let  us  suppose  that  the  lawyer  for  the  insured  proposes 
that  the  loss  be  settled  on  the  basis  that  the  general  policy 
must  float  over  all  property  and  contribute  on  the  basis  or 
proportions  of  the  respective  losses  on  the  specific  items.  The 
insurance  on  the  various  items  is  then  as  follows : — 


Furniture   

Jewelry     

Wearing  Apparel   .  . 


Co."G"  Co."S"  Total 

'10/20  of  $1,0001  =$500  $1,000  $1,500 

5/20  of     1,000 1  =    250  0  250 

5/20  of     l,000j  =    250  0  250 


Total    $1,000  $1,000  $2,000 

The  loss  on  furniture  was  $1,000  and  the  total  insurance  by 
this  method  is  $1,500,  of  which  company  "G"  insured  $500 
and  company  "S"  $1,000.  "G"  is  therefore  liable  for  one- 
third  of  the  loss  or  $333,  and  "S"  is  liable  for  two-thirds 
of  t'he  loss  or  $667.  The  loss  on  jewelry  and  wearing  apparel 
totaled  $1,000,  covered  onlv  by  a  general  policv  of  $1,000 
issued  by  "G"  and  of  this  only  $500  can  be  used  for 
jewelry  and  wearing  apparel.  The  total  lo.ss  is  therefore 
$2,000,  the  total  insurance  is  $2,000,  and  the  insured  recovers 
$1,500. 


SETTLEMENT  OF  LOSSES  265 

Either  of  the  above  bases  of  settlement  might  be  suggested 
and  the  justice  of  neither  is  proved  by  the  poHcy  provision. 
In  the  above  case,  at  least  five  other  methods  might  have  been 
suggested  for  the  settlement  of  the  loss  and  in  actual  practice 
many  more  difficult  problems  may  be  found.  It  is  obvious, 
therefore,  that  two  non-concurrent  policies  are  to  be  avoided 
wherever  possible.  The  courts  have  in  general  followed  the 
principle  of  fully  indemnifying  the  insured  when  the  insurance 
was  sufficient  for  that  result. 


Part  V 
MARINE  INSURANCE 


267 


Chapter  XIX 

MARINE  INSURANCE 

Nature  of  the  contract. — The  marine  insurance  policy  was 
originally  designed  to  protect  the  holder  against  perils  of  the 
sea  and  of  fire,  but  so  extensive  is  the  modern  coverage  that 
perils  of  the  land  as  well  are  now  included  within  the  scope  of 
the  contract.  Since  the  actions  of  the  master  and  the  rights  of 
shippers  are  governed  by  maritime  law,  such  law  is  In  many  re- 
spects impliedly  a  part  of  marine  insurance  contracts.  Like  fire 
insurance  policies,  the  marine  policy  is  issued  to  an  insured 
and  is  a  personal  contract. 

Unlike  the  fire  insurance  policy  which  consisted  principally 
of  the  exceptions  or  cases  where  the  underwriter  was  not  liable, 
the  underwriter  stipulates  in  the  marine  policy  the  risks  for 
which  he  is  liable.  As  a  result  he  has  received  more  liberal 
treatment  by  the  courts.  The  marine  contract  is  designed  to 
protect  the  insured  against  accidents  only  and  does  not  Indemni- 
fy for  natural  wear  and  tear  and  losses  which  are  inevitable. 
In  credit  insurance  the  Insured  bears  the  "normal"  loss;  so  in 
marine  insurance  he  bears  depreciation  and  losses  which  are  not 
accidental. 

Factors  essential  to  a  valid  contract. — 1.  Good  faith  and 
fair  dealing  have  always  been  strictly  required  by  the  courts  In 
respect  to  contracts  of  marine  insurance  because,  by  the  nature 
of  the  subject-matter  the  underwriter  Is  not  in  a  position  to 
conduct  an  extensive  investigation.  The  ship  or  cargo  may  be 
far  removed  from  the  place  where  the  contract  is  made.  The 
courts,  for  example,  have  held  the  Insured  as  strictly  bound  by 
certain  implied  warranties  designed  to  protect  the  underwriter. 

2.  An  insurable  interest,  vested,  contingent  or  expectant.  Is 
required.  The  doctrine  of  insurable  interest  is  essentially  the 
same  in  fire  Insurance  and  In  marine  Insurance.  The  former 
has  been  fully  discussed. 

3.  Seaworthiness  of  the  vessel.  It  is  an  implied  warranty, 
by  which  the  Insured  Is  strictly  bound,  that  the  vessel  is  safe 
and  in  a  condition  to  carry  the  cargo  contemplated.     With  re- 

269 


270    INSURANCE  PRINCIPLES  AND  PRACTICES 

spect  to  voyage  policies  on  hull  this  warranty  is  interpreted 
literally  but  in  cargo  policies  innocent  shippers  have  been 
given  some  consideration,  and  in  time  policies  on  hull  this 
warranty  is  often  not  involved  since  the  vessel  is  out  of  the 
possession  of  the  owner  and  beyond  his  power  to  inspect, 

4.  LegaUty  of  the  venture.  The  object  of  the  voyage  must 
be  of  a  character  not  prohibited  by  law.  Thus,  a  policy 
on  a  vessel  engaged  in  smuggling  goods  mto  the  United  States, 
in  violation  of  the  revenue  laws,  is  void. 

5.  The  voyage  must  he  prosecuted  without  deviatio)i. 
The  vessel  must  proceed  over  the  customary  route  and  with- 
out unnecessary  delay.  Deviation  by  the  master  on  his  own 
responsibility,  without  orders  from  the  owner  or  in  viola- 
tion of  such  orders,  however,  constitutes  "barratry" — a  peril 
against  which  the  marine  policy  protects  the  insured.  A 
deviation  due  to  the  necessity  of  saving  human  life,  or  of  pro- 
tecting the  subject-matter  insured,  is  held  to  be  justifiable  by 
a  permission  endorsed  on  the  policy. 

Types  of  underwriters. — Marine  insurance,  like  fire  insur- 
ance, is  written  by  stock  companies,  mutuals,  Lloyds  associations 
and  Interinsurance  associations.  These  have  been  described 
in  a  previous  chapter  and  it  is  sufficient  to  notice  here  some 
minor  variations. 

1.  A  distinctive  American  mutual.  Only  one  marine  mu- 
tual of  any  consequence  exists  at  present  in  the  United  States. 
The  original  capital  was  furnished  by  the  ship-owning  and 
trading  organizers,  whose  promissory  notes  furnished  a  source 
of  credit.  These  notes  served  as  premium  payments  to  cover 
risks,  and  when  a  sufficient  amount  was  secured,  the  company 
was  organized  and  gradually  accumulated  a  surplus.  This 
was  retained  as  a  guarantee  for  the  payment  of  losses  and 
in  time  was  divided  among  the  persons  insured;  but  payment 
was  at  first  deferred  and  the  insured  received  only  a  redeem- 
able scrip  certificate.  Such  scrip  could  be  sold  by  the  re- 
cipient or  retained  until  it  was  redeemed,  redemption  being 
in  the  order  of  issuance. 

2.  Mutual  insurance  clubs.  These  are  mutual  organiza- 
tions in  the  form  of  assessment  societies.  The  claim  for  a 
loss  is  a  claim  against  the  association,  the  members  of  which 
pay  an  entrance  fee  and  frequently  an  initial  premium.  In 
the  absence  or  insufficiency  of  initial  premiums,  the  members 
are  assessed  for  the  payment  of  losses  'ncurred  during  the 


MARINE  INSURANCE  271 

year.  The  contributions  by  members  are  usually  either  in 
proportion  to  the  amounts  for  which  they  are  insured  or  In 
proportion  to  the  gross  tonnage  of  their  vessels.  Some  of  these 
associations  are  designed  to  insure  the  ordinary  marine  risks 
on  terms  similar  to  the  policies  issued  by  stock  companies, 
some  are  intended  to  insure  freight  particularly,  some  cover 
deductions  made  by  stock  companies  in  the  adjustment  of 
losses,  some  insure  against  loss  of  time  and  others  are  "pro- 
tection and  indemnity  associations."^  The  latter  cover  dam- 
ages recovered  for  destruction  of  life,  for  injuries  to  the 
crew  covered  by  the  Compensation  Act  of  Great  Britain,  for 
loss  of  or  damage  to  goods  carried,  for  collision  liabilities 
not  covered  by  the  ordinary  policy,  for  the  expense  of  raising 
wrecks  and  for  expenses  of  quarantine.  They  have  the  cus- 
tomary advantages  and  disadvantages  of  assessment  mu- 
tuals  and  are  peculiar  to  European  countries,  never  having 
become  important  here. 

Different  classes  of  policies. — The  most  Important  features 
in  distinguishing  classes  of  policies  are  ( 1 )  the  interest  of 
the  insured,  (2)  the  valuation  of  the  subject-matter,  (3)  the 
term  of  the  policy,  (4)  the  description  of  the  vessel  or  cargo, 
and  (5)  the  scope  of  coverage.  These  we  will  consider  In 
order. 

1.  Interest  of  the  insured. — Policies  in  this  respect  may 
be  classified  as: 

a.  Vessel  policies,^  covering  the  vessel  and  equipment. 

b.  Cargo  policies,^  covering  goods  to  be  transported. 

c.  Freight  policies,  covering  either  the  sum  charged  for 
transporting  the  cargo,  the  hire  paid  for  a  vessel  or  the  in- 
crease in  the  value  of  goods  added  by  transportation. 

d.  Policies  made  to  cover  profits,  commissions,  etc.,  us- 
ually Include  these  values  In  the  valuation  of  the  cargo. 

The  above  refers  to  policies  supported  by  an  insurable 
interest  which  is  legally  recognized,  these  being  designated  as 
"Interest"  policies;  but  policies  may  also  be  issued  where  the 
"interest  is  admitted."  The  latter  are  unenforceable  at  law  and 
depend  upon  the  honor  of  the  parties,  but  are  sometimes 
necessary  to  protect  a  prospective  Insurable  Interest  not  rec- 
ognized by  law. 

'  See  Appendix  LXIV. 
'See  Appendix  LXIII. 
'  See  Appendix  LXII. 


272    INSURANCE  PRINCIPLES  AND  PRACTICES 

2.  The  valuation  of  the  subject  matter. — We  have  seen 
that  "valued"  policies,  in  which  the  total  value  of  the  subject- 
matter  is  agreed  upon  at  the  issuance  of  the  policy,  are  in- 
frequent in  fire  insurance.  In  marine  insurance  they  are  the 
common  thing,  due  to  the  character  of  the  business  and  to 
well-established  custom.  Policies  may  therefore  be  classified 
on  the  basis  of  valuation  as: 

a.  Valued  policies,*  where  the  value  of  the  subject-matter 
is  specified  in  the  policy.  The  values  of  vessel  and  machin- 
ery are  often  separately  stated  in  these  policies. 

b.  Open  or  unvalued  policies,  where  no  value  is  agreed 
upon  and  it  must  subsequently  be  ascertained  and  proved. 
The  expression  "open  policy"  has  also  been  applied  to  float- 
ing policies  and  to  a  cargo  form  discussed  later. 

3.  The  term  of  the  policy. — With  reference  to  the  dura- 
tion of  the  policy,  the  contracts  may  be  divided  into  two  major 
groups  as  follows: 

a.  Time  policies,^  which  cover  for  a  specific  period  of 
time,  regardless  of  the  number  of  voyages  made.  Special 
varieties  arc:  port  policies  covering  a  vessel  for  a  definite 
period  while  In  port,  and  construction  policies  covering  ves- 
sels in  process  of  building. 

b.  Voyage  policies,  which  cover  only  a  specific  trip.  This 
type  of  policy  Is  better  adapted  to  cargo  than  hull  Insurance. 

4.  Description  of  the  vessel  or  cargo. — In  this  respect, 
policies  may  be  classified  as: 

a.  Floating  policies,  which  cover  cargo  shipped  on  any 
vessel  or  vessels  or  upon  any  vessel  of  a  particular  line  or 
group  of  lines. 

b.  Named  policies,  where  only  a  particular  vessel  or  cargo 
on  a   particular  vessel   Is   covered. 

c.  Fleet  policies,  covering  a  group  of  vessels  designated 
by  name. 

d.  Open  cargo  forms,"  covering  all  declared  shipments 
made  within  named  geographical  limits. 

e.  Blanket  policies,  which  cover  shipments  within  certain 
time  and  geographical  limits,  up  to  a  stipulated  maximum 
amount,  on  which  the  premium  is  paid. 

f.  Special  types  of  policies  covering  tugs,  yachts,  fishing 

*  See  Appendix  LXIII. 
"See  Appendix  LXIII. 
'  See  Appendix  LXII. 


MARINE  INSURANCE  273 

vessels,  canal  hulls,  lake  steamers,  barges,  river  cargoes,  live 
stock,  lumber,  etc. 

5.  Scope  of  coverage. — Policies  may  be  grouped  with 
respect  to  their  coverage  of: 

a.  The  customary  perils  described  later. 

b.  War  risks,  including  hazards  peculiar  to  a  state 
of  war. 

c.  Total  loss  only. 

d.  Special  risks.  It  should  be  noted  that  the  insured  and 
the  underwriter  may  by  special  agreement  fix  upon  one  or 
more  stipulated  perils  against  which  protection  is  afforded 
or  may  introduce  modifications  of  the  underwriter's  liability.^ 
Uses  of  these  policies:  1.  Vessel,  cargo  and  freight  policies. — 
Vessel  and  cargo  policies  require  no  description.  The  latter 
are  primarily  important  from  a  premium  income  standpoint, 
an  investigation  of  72  American  companies  in  1920  showing 
that  43,  or  over  one-half  of  the  total,  derived  less  than  one- 
third  of  their  premium  income  from  hull  business.  Capital 
can  be  turned  over  much  more  rapidly  in  the  cargo  than  in 
the  hull  business  and  it  is  in  general  more  profitable. 

Policies  on  freight  and  other  interests  require  a  brief  ex- 
planation. A  vessel-owner  who  is  to  receive  his  recompense 
for  the  service  of  transportation  upon  the  delivery  of  the 
goods  risks  the  loss  of  his  freight  if  he  fails,  through  some 
marine  peril,  to  deliver  the  cargo.  If,  on  the  other  hand,  the 
shipper  pays  the  freight  in  advance,  without  right  of  recov- 
ery, the  value  of  the  freight  is  incorporated  in  the  goods  and 
their  loss  will  also  involve  the  loss  of  the  freight  paid.  Either 
the  owner  of  the  vessel  or  the  shipper,  as  circumstances  war- 
rant, may  therefore  desire  to  Insure  the  freight.  A  vessel 
operator  may  charter  or  rent  a  vessel  for  a  voyage,  let  us  say, 
the  rental  to  be  paid  in  advance  and  without  right  of  recov- 
ery. This,  then,  is  another  form  of  freight  money  which,  by 
the  loss  of  the  vessel,  is  also  lost.  By  placing  a  sufficiently 
high  valuation  on  his  goods  a  cargo  owner  may  insure  the  ex- 
pected profit  on  the  goods  at  destination.  The  arbitrary  figure 
of  10  per  cent  is  often  used  in  estimating  this.  "Interest 
admitted"  or  "policy  proof  of  Interest"  policies  may  be  used 
to  protect  a  contingent  benefit,  such  as  the  prospective  charter 
of  a  vessel  for  which  no  contract  has  as  yet  been  definitely 
made;    a  mere  expectation. 

'  See  Appendices  LXV  to  C,  inclusive. 


274    INSURANCE  PRINCIPLES  AND  PRACTICES 

2.  Valued  and  open  policies. — Valued  policies  enable  the 
underwriter  and  the  insured  to  agree  in  advance  on  the  value 
of  the  subject-matter  and  consequently  to  avoid  the  controversy 
and  litigation  which  might  otherwise  arise  when  a  loss  occurs. 
The  uncertainty  of  expenses  and  profits  makes  it  difficult  for 
the  insured  to  know  the  real  value  of  his  goods  at  destina- 
tion and  it  seems  reasonable  and  safe  to  agree  upon  some 
value  which  is  not  excessive,  inasmuch  as  the  goods  are  out 
of  the  possession  of  the  insured  and  the  moral  hazard  con- 
sequently greatly  reduced.  The  actual  value  of  a  vessel  is 
constantly  changing  because  of  the  freight  market  and  trade 
conditions,  and  under  any  circumstances  is  difficult  to  compute. 
If,  however,  the  value  of  the  subject-matter  insured  cannot 
even  be  approximated,  the  insured  or  the  underwriter  may 
prefer  to  leave  the  settlement  of  this  important  question  until 
a  loss  occurs. 

3.  Time  and  voyage  policies.  Time  policies  give  protec- 
tion for  a  stipulated  period  and  therefore  avoid  the  annoyance 
of  constant  attention  to  the  termination  of  voyages  and  to 
the  renewal  of  policies.  On  hulls  they  are  therefore  the  com- 
mon type.  In  the  time  policy  the  insured  avoids  the  neces- 
sity of  continually  describing  separate  voyages,  many  of  which 
are  over  similar  routes.  Under  such  policies  the  warranty 
of  seaworthiness  cannot  be  so  strictly  construed  as  under  a 
voyage  policy.  Since  cargoes  are  subject  to  sea  risks  for  com- 
paratively short  periods,  however,  the  voyage  policy  is  fre- 
quently used.  To  tramp  steamers  and  sailing  vessels  the  voy- 
age policy  Is  particularly  adapted,  Inasmuch  as  these  do  not 
move  over  fixed  routes,  and  their  travels  may  be  more  easily 
described  by  separate  voyage  policies. 

4.  Special  time  policies. — The  port  risks  policy  Is  a  spe- 
cific variety  of  time  policy.  A  considerable  period  often 
elapses  before  a  vessel  sails;  or,  due  to  the  freight  market, 
a  vessel  may  be  voluntarily  laid  up  in  port  for  a  short  space 
of  time,  her  operation  being  unprofitable.  To  pay  the  higher 
premium  required  for  coverage  of  navigation  risks  would  be 
a  useless  outlay  and  the  owner  consequently  acquires  a  policy 
protecting  the  vessel  "whilst  at  and  or  within  the  limits  of  the 

port  of ,"  with  leave  to  dock,  change  docks,  move  about 

in  tow  within  the  prescribed  limits  or  go  on  a  slipway,  gridiron 
or  pontoons  for  refitting,  etc.  When  the  policy  is  cancelled, 
a  portion  of  the  premium  is  returnable.     The  builder's  risk 


MARINE  INSURANCE  275 

policy  is  also  a  special  time  policy,  protecting  the  builder  and 
owner  as  their  interests  may  appear,  from  the  time  of  laying 
the  keel  until  the  delivery  of  the  completed  vessel.  Separate 
insurances  may  be  issued,  one  covering  the  period  prior  to  the 
launching  and  the  other  the  period  subsequent  to  launching 
but  prior  to  delivery.  On  large  modern  steamers  these  poli- 
cies are  of  considerable  size  and  the  premium  is  based  upon 
the  maximum  liability  of  the  insurer  in  case  of  the  total  loss 
of  the  vessel  before  delivery.  If  the  construction  requires 
more  than  the  time  anticipated,  the  policy  is  renewed;  if  the 
vessel  is  completed  ahead  of  time,  the  policy  may  be  cancelled 
with  the  return  of  a  portion  of  the  premium.  The  policy 
protects  against  all  the  risks  covered  by  the  ordinary  marine 
policy  and  in  addition  against  fire,  while  under  construction 
or  at  the  dock,  and  against  damage  from  collapse  of  supports, 
etc.,  and  the  risks  of  launching,  including  breakage  of  the 
ways.  After  launching,  the  hazards  of  trial  trips  and  col- 
lisions, negligence,  explosions,  breakage  and  latent  defects  are 
covered.  Such  policies  commonly  contain  a  "protection  and 
indemnity  clause,"  found  also  in  other  hull  policies,  designed 
to  cover  the  insured's  liability  for  damage  done  to  the  persons 
and  property  of  others.®  This  does  not  include  the  liability 
of  the  insured  under  a  compensation  act,  hazards  incident  to 
a  state  of  war,  strikes,  lockouts,  labor  disturbances,  riots  and 
commotions,  earthquakes  and  delay.  Partly  due  to  the  war, 
this  type  of  insurance  has  not  as  yet  reached  large  proportions 
among  American  companies,  but  is  rapidly  growing.  Of  53 
American  companies,  12  received  no  premiums  on  this  class 
of  business,  32  derived  from  ^  of  1  per  cent  to  5  per  cent 
of  their  total  premiums  therefrom,  and  9  obtained  over  5  per 
cent  of  their  premiums  from  this  source,  including  one  com- 
pany whose  income  of  this  character  aggregated  34  per  cent 
of  its  total  premiums. 

5.  Floating  and  named  policies. — Floating  policies,  apply- 
ing to  cargo  shipped  by  any  vessel  or  vessels,  are  applicable 
to  known  shipments  on  unknown  vessels.  Thus,  an  American 
importer  may  be  aware  that  goods  have  been  consigned  to  him 
from  a  particular  source,  but  he  may  be  unaware  of  the  name 
of  the  vessel  or  even  of  the  line  on  which  such  goods  are 
being  transported.     When  the  vessel  is  known,  the  fact  is 

'  See  Appendix  LXIV. 


276    INSURANCE  PRINCIPLES  AND  PRACTICES 

communicated  to  the  underwriter  and  the  policy  transformed 
into  a  named  policy. 

6.  Fleet  policies. — A  fleet  policy  is  a  convenience  to  a  line 
owning  a  number  of  vessels,  for  they  are  by  this  means  cov- 
ered in  a  single  policy.  In  addition,  the  insured  may  receive 
a  more  favorable  rate  than  could  be  obtained  on  separate 
insurances,  Inasmuch  as  it  is  uniform  for  the  entire  insurance 
and  based  upon  the  average  condition  and  character  of  the 
vessels.  Exceptionally  poor  risks  are  thereby  counterbal- 
anced by  better  vessels.  Indeed,  vessels  which  v/ ould  be  uninsur- 
able separately  might  be  cov^ered  by  this  method,  as  the 
underwriter  must  take  or  reject  the  entire  lot. 

7.  Open  cargo  forms. — The  open  cargo  form  is  one  of 
the  most  common  types  of  policies.  It  is  estimated  that  90 
per  cent  of  the  cargo  coverage  is  of  this  kind.^  The  policy 
usually  runs  for  an  indefinite  period  of  time  and  all  shipments 
of  the  insured  during  this  period  are  protected,  provided  he 
declares  the  same  to  the  underwriter  and  pays  a  premium 
thereon.  There  is  therefore  a  constant  reporting  of  new  risks 
to  be  covered  and  of  terminations  of  risks  upon  cargoes  which 
have  arrived  safely,  a  rate  schedule  attached  to  the  policy 
serving  as  a  guide  to  the  rates  which  will  be  charged.  In  order 
to  restrict  the  extent  of  risk  assumed  by  the  company,  a  maxi- 
mum coverage  on  any  one  vessel  is  stipulated,  and  it  is  also 
provided  that  "the  sound  value  at  the  port  or  place  of  des- 
tination outward  is  to  be  deemed  not  to  exceed  the  purchasing 
price  at  the  shipping  port,  and  10  per  cent  added  thereto,  ex- 
clusive of  duty  and  freight."  The  open  cargo  form  therefore 
practically  provides  insurance  in  advance  upon  any  shipments 
in  which  the  exporter  or  importer  is  interested.  They  will  all 
be  covered,  whether  shipped  with  or  without  his  knowledge, 
provided  prompt  notification  is  given  to  the  insurance 
company. 

8.  Blanket  policies. — In  the  blanket  policy  the  maximum 
amount  of  protection  which  will  be  required  is  estimated  and 
this  protection  is  purchased  in  a  lump  sum,  the  premium  being 
based  on  this  amount.  The  nature  of  the  goods  and  the 
geographical  area  to  be  traversed  are  described,  and  all  goods 
so  designated  are  covered.  As  losses  are  paid  the  full  amount 
of  the  policy  must  be  reinstated  by  additional  premium  pay- 
ments entailing  additional  cost  to  the  insured,   whereas  the 

"  See  Appendix  LXII. 


MARINE  INSURANCE  211 

underwriter  is  assured  of  the  full  amount  of  business  for  the 
period  named.  Should  the  actual  shipments  exceed  or  fall 
short  of  the  estimated  amount,  the  excess  or  deficit  is  covered 
by  an  adjustment  of  the  premium  made  at  an  agreed-upon 
rate. 

9.  Ordinary  and  special  hazards. — It  was  at  one  time  cus- 
tomary for  marine  policies  to  cover  not  only  ordinary  mari- 
time risks  but  also  special  hazards  incident  to  war  and  piracy. 
Later  such  special  hazards  were  excluded  from  the  ordinary 
policy  and  written  as  "war  risk"  insurance."  The  latter  gives 
protection  against  capture,  seizure,  detention,  damage  by 
capture  at  sea,  arrests,  restraints  and  condemnation,  with  an 
agreement  by  the  insured  that  he  will  not  abandon  in  case  of 
blockade  or  capture  until  after  condemnation. 

In  some  cases  the  underwriter  does  not  care  to  write  a  pol- 
icy covering  all  the  customary  maritime  losses,  the  majority 
of  which  are  partial,  and  issues  a  policy  protecting  against 
total  loss  only,  at  a  considerably  reduced  premium.  Some- 
times partial  insurance  against  all  losses  is  supplemented  by 
an  additional  policy  covering  total  loss  only,  thus  giving  the 
insured  protection  against  great  disasters  at  a  very  reasonable 
premium,  and  some  protection  against  partial  loss. 

Analysis  of  the  policy. — It  will  now  be  desirable  to  examine 
some  of  the  principal  clauses  of  the  policy  contract  pertaining 
to  the  description  of  the  subject-matter,  the  beginning  and 
termination  of  the  coverage,  the  perils  protected  against, 
double  insurance  and  subrogation,  leaving  the  subject  of  losses 
for   separate  consideration  later. 

1.  The  description. — We  have  already  discussed  the  de- 
scription of  the  insured's  interest  under  the  fire  policy  and 
many  of  the  remarks  there  made  are  equally  applicable  to 
marine. insurance.  Unless  both  parties  are  certain  of  the  trade 
usage  and  the  legal  decisions  pertaining  to  such  general  terms 
as  "cargo"  and  "goods,"  their  use  is  dangerous  because  of 
their  uncertain  scope.  Thus,  refrigerated  goods  and  live  stock 
are  well  recognized  as  not  comprehended  by  the  above  ex- 
pressions and  the  status  of  other  articles  is  extremely  doubt- 
ful. This  uncertainty  may  be  easily  avoided  by  a  definite 
description  of  the  goods.  The  description  or  name  of  the 
vessel  is  naturally  an  important  part  of  the  policy  because  of 
its  influence  upon  the  acceptance  of  the  risk  and  upon  the  rate 

'"See  Appendix  LXV. 


278    INSURANCE  PRINCIPLES  AND  PRACTICES 

of  premium.  A  mistake  or  change  in  the  master  is  not  now 
considered  so  important. 

2.  Inception  and  termination  of  the  coverage. — In  the 
case  of  a  time  policy  on  hull  the  risk  clearly  begins  at  a  speci- 
fied date  and  ends  at  a  specified  date,  the  vessel  being  covered 
while  within  any  geographic  or  other  restrictions  contained  in 
the  policy.  Various  sailing  warranties  may  be  introduced  in 
the  policy  by  endorsement  as,  for  instance,  where  a  ship  is 
warranted  to  confine  its  operation  to  the  harbors  of  a  given 
port,  or  not  to  operate  in  specified  waters,  such  as  the  Arctic 
regions,  or  warranted  not  to  ply  the  Great  Lakes  between  De- 
cember 2d  and  April  15th."  If  the  vessel  is  at  sea  on  the 
date  when  the  contract  terminates  an  automatic  extension  of 
the  insurance  which  protects  the  insured  until  the  vessel 
reaches  the  port  of  destination  Is  provided,  at  a  pro  rata 
monthly  premium.  In  the  case  of  a  fleet  policy  the  location 
of  particular  vessels  does  not  matter,  for  it  is  to  be  expected 
that  some  will  be  at  sea  on  the  date  of  expiration. ^^  Time 
policies  are  in  general  inapplicable  to  cargo  risks,  but  a  floating 
policy  provides  that  goods  shipped  on  and  after  a  certain 
date  are  covered  from  the  time  they  are  loaded  on  board  the 
vessel.  The  loading  is,  therefore,  the  important  factor  in  the 
beginning  of  the  risk. 

In  a  voyage  policy  on  hull  the  risk  begins  when  the  vessel 
breaks  ground  for  the  given  voyage,  if  the  insurance  is  "from" 
a  port.  If  insured  "at  and  from"  a  port,  she  is  covered  while 
at  the  port  and  making  preparations  for  sailing.  In  both 
cases  the  risk  terminates  when  the  vessel  has  reached  the  port 
of  destination  and  has  beeri  moored  twenty-four  hours  in 
safety,  both  physical  and  political.  A  voyage  policy  on  cargo  ap- 
plies from  the  time  the  goods  are  loaded  on  board  the  vessel 
until  they  are  safely  landed  at  destination.  The  principal 
question  which  arises  here  is  as  to  whether  the  goods  are 
covered  when  lighterage  is  necessary  to  ship  or  land  the  goods. 
The  earlier  view  was  that  the  risk  of  lighterage  was  not  cov- 
ered, but  at  present  there  seems  to  be  a  tendency  to  hold  that 
if  the  use  of  lighters  is  necessary  or  customary,  the  risk  is 
covered  by  the  policy.  In  England,  the  Marine  Insurance 
Act  specifically  excludes  the  lighterage  risk.  In  order  to  ren- 
der this  point  certain  a  clause  assuming  responsibility  for  the 

"  See  Appendix  XCVI. 
"  See  Appendix  LXIII. 


MARINE  INSURANCE  279 

lighterage  risk  or  one  disclaiming  such  liability  is  often  en- 
dorsed on  the  policy. 

While  the  marine  policy  was  originally  intended  to  cover 
sea-perils,  the  scope  of  the  protection  has  been  vastly  extended 
in  modern  times  by  policy  endorsements.  An  excellent  illus- 
tration of  this  is  the  "warehouse  to  warehouse"  clause,"  under 
which  the  insurer  assumes  responsibility  for  losses  from  the 
time  the  goods  leave  the  factory,  store,  or  warehouse  at  the 
initial  point  of  shipment  until  the  same  are  delivered  at  store 
or  warehouse  at  destination. 

3.  The  perils  covered  by  the  policy. — ^The  marine  policy 
is  intended  to  indemnify  for  losses  resulting  from  unforeseen 
and  accidental  causes  only.  Thus,  a  collision  with  another  ves- 
sel, a  storm  at  sea,  the  striking  upon  a  rock,  stranding,  damage 
of  cargo  by  sea-water,  are  all  unanticipated  results  of  a  ven- 
ture. The  policy  does  not  cover  losses  which  are  natural  and 
customary,  such  as  the  ordinary  wear  and  tear  of  materials, 
natural  decay  through  passage  of  time,  damage  from  the  in- 
herent vice  of  the  article  or  the  ordinary  leakage  of  liquid 
cargoes.  The  perils  which  the  underwriter  assumes^*^  may 
be  conveniently  grouped  as  follows: 

a.  Perils  of  the  sea. — This  group  does  not  include  all 
perils  which  may  occur  on  the  sea  but  only  such  as  arc  "of"  the 
sea.  Thus,  seizure  is  a  peril  encountered  on  the  sea  but  is  not 
a  peril  of  the  sea.  This  group  includes  such  perils  as  the  dan- 
ger of  being  driven  ashore  by  heavy  seas,  of  sinking  as  a  result 
of  striking  upon  a  rock  or  sunken  vessel,  damage  by  light- 
ning, stranding,  collision  with  another  vessel,  springing  a  leak 
in  bad  weather  and  damage  to  cargo  by  salt-water.  Miss- 
ing vessels  are  presumed  to  have  been  destroyed  by  perils  of 
the  sea,  but  this  is  subject  to  rebuttal  in  time  of  war. 

b.  Fire. — Included  in  the  peril  of  fire  is  also  the  danger 
of  loss  to  vessel  or  cargo  resulting  from  efforts  to  extinguish 
fire.  Thus,  goods  may  be  damaged  by  water  or  by  steam  used 
for  this  purpose.  It  includes  also  consequential  loss  from 
this  cause,  such  as  damage  caused  by  smoke  or  odor.  Under- 
writers are  not  liable  for  damage  to  goods  whose  own  con- 
dition or  Inherent  vice  caused  the  fire. 

c.  Perils  dependent  upon  the  acts  of  those  on  board  the 
vessel. — Suppose,  for  example,  that  the  dangerous  position 

"  See  Appendix  LXXV. 

**  See  the  policies  in  Appendices  LXII  and  LXIII. 


280    INSURANCE  PRINCIPLES  AND  PRACTICES 

of  the  vessel  requires  the  master  to  sacrifice  a  portion  of  the 
cargo  for  the  general  safety.  This  is  an  act  which  is  for  the 
benefit  of  the  owners  of  the  vessel  and  of  the  cargo  and,  in 
general,  of  the  insurers.  The  underwriter  is  consequently  lia- 
ble for  losses  so  resulting.  A  long  line  of  legal  decisions 
has  accurately  defined  acts  of  this  character,  as  shown  later. 
Another  situation  Is  found  where  the  master  of  the  ves- 
sel, instead  of  acting  for  the  benefit  of  others,  is  acting 
in  his  own  interest  and  against  the  interests  of  the  owners 
of  the  vessel  and  of  the  cargo  as,  for  example,  where  he 
deviates  from  the  course  for  his  own  personal  interests  or 
sinks  a  vessel  for  revenge.  This  is  a  peril  which  is  logically 
a  subject  for  some  form  of  insurance  other  than  marine,  being 
similar  to  the  hazards  encountered  in  corporate  bonding,  but 
it  is  ordinarily  covered  by  the  marine  policy. 

d.  Perils  arising  from  the  actions  of  persons  not  on  hoard. 
This  group  of  perils  was  originally  covered  by  every  marine 
policy,  was  afterward  excluded  from  coverage  by  endorse- 
ment, and  Is  now  covered  by  a  second  endorsement  when  de- 
sired, for  an  extra  premium.  In  the  main.  It  comprises  perils 
peculiar  to  a  state  of  war  or  piracy,  including  theft  other  than 
pilferage,  capture  by  pirates  or  rovers,  men  of  war  or  priva- 
teers, reprisals,  restraints  and  detainments. 

e.  *'All  other  perils." — This  phrase  is  not  so  inclusive  as 
it  sounds,  because  the  courts,  following  the  rule  of  ejusdem 
generis,  have  held  that  It  covers  only  perils  similar  In  char- 
acter to  those  previously  enumerated.  Thus,  the  firing  upon 
a  vessel  by  a  war  vessel  of  the  same  nationality  In  mistake, 
the  throwing  overboard  of  money  to  prevent  capture,  the  dam- 
age to  goods  by  water  entering  a  discharge  pipe  which  was 
forced  below  the  surface  by  the  weight  of  the  cargo  loaded, 
have  all  been  held  cases  sufficiently  similar  to  those  enumerated 
to  justify  recovery.  Certain  types  of  explosions  have  been 
considered  as  outside  this  class,  as  is  true  also  of  bursting 
boilers  and  latent  machinery  defects. 

It  is  not  sufficient  that  one  of  the  above  perils  shall  have 
been  Instrumental  In  causing  the  loss  to  impose  liability 
on  the  underwriter;  the  peril  must  have  been  the  proximate 
cause  of  the  loss.  The  proximate  cause  Is  usually  the  imme- 
diate as  distinguished  from  the  remote  cause,  provided  such 
immediate  cause  Is  a  predominating  and  not  a  minor  one. 
Underwriters  have   frequently  been  held  liable   where,   after 


MARINE  INSURANCE  281 

a  captain  or  mate  had  been  negligent,  the  subject-matter 
was  damaged  by  accident  or  fire,  even  though  the  negligence 
contributed  to  the  disaster.  On  the  other  hand,  where  the  pre- 
dominating cause  has  been  gross  negligence  and  subsequent 
contributory  causes  were  insignificant  in  character,  the  under- 
writers have  not  been  held  responsible. 

4.  Double  insurance  and  subrogation. — Where  the  same 
vessel  or  goods  are  insured  by  more  than  one  underwriter,  the 
liability  of  such  underwriters  is  determined  by  the  priority 
of  the  contracts.  The  prior  policy  is  liable  for  any  loss  until 
it  is  exhausted  and  the  subsequent  policy  is  liable  for  the  bal- 
ance. The  premium  is  returned  on  that  portion  of  the  subse- 
quent insurance  which  is  over-insurance. ^'^ 

Upon  the  payment  of  a  loss  to  an  insured,  as  has  been 
previously  explained,  the  underwriter  acquires  all  the  rights 
of  the  insured  pertaining  to  said  loss.  Furthermore,  the  in- 
surance company  would  naturally  be  subrogated  to  any  claim 
for  negligence  which  the  insured  might  have  against  a  carrier. 
Carriers  have  attempted  to  counteract  their  liability  by  pro- 
viding that  any  insurance  recovered  should  inure  to  their  bene- 
fit, this  being  followed  by  the  introduction  of  a  clause  in  the 
policy^''  to  the  effect  that  the  pob'cy  would  be  void  if  any  agree- 
ment that  the  carrier  should  receive  the  benefit  of  the  insur- 
ance existed  in  the  bill  of  lading  or  otherwise.  Other  clauses 
prevent  the  insured  from  prejudicing  in  any  way  the  insurer's 
recovery  by  releasing  or  impairing  rights  against  third  parties, 
or  assigning  any  interest  or  right. 

Various  Types  of  Losses. — 1.  The  incidence  of  the  loss. — 
For  a  better  understanding  of  the  sections  which  follow,  it 
is  necessary  to  insert  here  a  classification  of  maritime  losses 
which  has  no  direct  connection  with  insurance.  It  is  based 
upon  the  manner  in  which  the  loss  is  borne  by  the  various  in- 
terests concerned.  General  average  losses  are  those  which 
are  borne  by  all  parties  concerned  in  the  venture,  vessel,  cargo 
and  freight."  Thus,  if,  in  time  of  peril,  the  master  is  com- 
pelled to  damage  his  vessel  for  the  general  benefit,  it  is  only 
just  that  all  concerned  should  contribute  to  reimburse  him  for 
his  voluntary  sacrifice.  But  in  order  to  maintain  the  justice 
of  such  contributions  the  courts  have  said  that  the  loss  must 

*'  See  policy  in  Appendix  LXII. 

"See  Appendix  LXII. 

"The  compensation  for  carrying  goods. 


282    INSURANCE  PRINCIPLES  AND  PRACTICES 

be  the  result  of  a  voluntary  sacrifice,  incurred  in  time  of  peril, 
for  the  benefit  of  all  parties  concerned,  reasonable  in  char- 
acter and  by  order  of  the  master  or  person  in  command.  The 
jettison  of  cargo,  described  in  the  section  on  perils,  will  be 
recognized  as  meeting  the  conditions  prescribed;  also,  beach- 
ing a  vessel,  water  damage  in  extinguishing  a  fire,  damage 
to  machinery  through  extraordinary  efforts  to  float  a  stranded 
vessel,  unusual  expenses  incurred  at  a  port  of  refuge,  and 
many  other  types  of  losses  may  fulfil  the  conditions. 

The  method  of  adjusting  a  general  average  loss  is  as  fol- 
lows. The  ship-owner  or  his  representative  arranges  for  the 
adjustment  of  the  loss  and  usually  employs  an  experienced 
average  adjuster  for  the  purpose.  The  master  of  the  vessel  is 
required  to  keep  the  interests  together  until  adequate  secur- 
ity for  any  liability  may  be  obtained.  A  general  average 
bond  and  a  marine  insurance  policy  are  usually  sufl^cient,  but 
in  the  absence  of  the  latter  a  cash  deposit  may  be  required. 
After  a  survey  of  the  damaged  goods  and  a  determination 
of  the  amount  of  loss  have  been  made,  the  various  interests 
are  appraised  to  find  a  basis  for  the  respective  contributions. 
Let  us  take  a  simple  illustration  to  see  the  significance  of  this 
basis.  A  vessel  is  valued,  we  will  suppose,  at  $300,000,  the 
cargo  at  $400,000  and  the  freight  money  at  $40,000,  and  in 
the  course  of  the  voyage  $7,400  of  cargo  is  sacrificed  for  the 
general  benefit  under  conditions  which  make  it  a  general  aver- 
age loss.  All  the  cargo,  we  will  assume,  is  owned  by  one 
shipper.    The  total  value  of  the  venture  is  found  to  be : 

Vessel    $300,000 

Cargo    400,000 

Freight    40,000 

Total   $740,000 

Each  interest  contributes  to  the  general  average  loss  in  the 
proportion  that  the  value  of  its  interest  bears  to  the  value  of 
all  interests,  giving  the  following  result: 

Vessel    30/74ths  of  $7,400,  or  $3,000 

Cargo     40/74ths  of     7,400,  or     4,000 

Freight  4/74ths  of     7,400,  or       400 

All  interests _. $7,400 

It  will  be  noticed  that  the  cargo-owner  must  contribute  $4,000 


MARINE  INSURANCE  283 

as  his  share  of  the  general  average  loss;  therefore,  he  re- 
ceives a  net  reimbursement  of  only  $3,400,  but  he  is  as  much 
a  partner  in  any  general  average  loss  that  may  occur  as  any 
one  else  and  must  bear  his  share.  If  the  persons  concerned 
are  insured  they  can  recover  for  their  contributions  from  the 
insurance  company,  provided  the  loss  is  due  to  a  misfortune 
insured  against;  if  they  carry  full  insurance,  they  can  each 
be  reimbursed  in  full.  If  only  partially  insured,  the  English 
law  permits  them  to  recover  only  in  the  proportion  that  the 
insurance  taken  bears  to  the  value  of  the  interest.  Thus,  if 
the  vessel-owner  had  insured  his  vessel  for  only  one-half  its 
value  in  the  above  case,  he  could  have  recovered  only  one- 
half  of  his  contribution  of  $3,000,  or  $1,500.  The  Amer- 
ican courts,  however,  have  not  followed  this  principle  in  some 
cases. 

The  second  type  of  loss  is  called  particular  average.  The 
burden  of  such  a  loss  rests  upon  the  particular  interests  which 
suffer.  Such  losses  are  different  in  character  from  general 
average  losses,  for  they  are  not  voluntary,  nor  incurred  for 
the  common  benefit,  but  are  the  result  of  accident  or  negli- 
gence. As  illustrations,  damage  to  the  vessel  by  fire,  damage 
to  the  vessel  by  heavy  seas,  stranding  or  collision,  loss  of  part 
of  the  cargo  in  unloading,  impairment  of  the  quality  of 
cargo  by  sea-water,  injury  to  cargo  by  fire,  loss  of  freight 
through  failure  to  deliver  cargo,  etc.,  may  be  cited.  The  set- 
tlement of  particular  average  losses  is  described  later  in  the 
sections  on  total  and  partial  loss. 

2.  Classification  of  losses  by  extent  and  character. — 
Viewed  from  the  standpoint  of  insurance,  losses  may  be  di- 
vided into  total  and  partial,  each  of  which  may  be  subdivided 
according  to  the  character  of  the  loss.  By  a  total  loss  we  mean 
complete  loss  or  destruction  of  the  subject-matter  of  the  policy. 
Thus,  a  shipper,  Jones,  may  have  on  board  a  vessel  a  cargo 
of  cotton  goods  valued  at  $20,000,  which  he  has  insured  in 
Company  X.  On  the  same  vessel,  Smith  may  have  shipped 
crockery.  Brown,  hardware,  and  Black,  furniture.  If  the 
cotton  goods  have  their  value  completely  destroyed  by  a  dis- 
aster insured  against,  Jones  and  Company  X  regard  this  as  a 
total  loss,  even  though  the  crockery,  hardware  and  furniture  are 
uninjured.  Likewise,  the  vessel  might  be  a  total  loss  even 
though  practically  all  the  cargo  were  saved.  A  partial  loss 
is  any  loss  other  than  total. 


284    INSURANCE  PRINCIPLES  AND  PRACTICES 

a.  Total  loss. — Total  loss  may  be  divided  into  two 
groups,  actual  total  loss  and  constructive  total  loss.  Actual 
total  loss  is  incurred  when  the  insured  loses  the  possession  of 
his  property,  as  where  it  is  captured  and  condemned  by  an 
enemy;  where  the  property  ceases  to  exist,  as  in  the  case  of 
a  vessel  which  founders  or  a  cargo  which  burns;  or  where  the 
property  ceases  to  exist  as  a  thing  of  its  kind,  as  where  food- 
stuffs arrive  in  a  putrid  state  or  hides  are  found  to  be  par- 
tially fermented.  A  constructive  total  loss  is  said  to  exist 
when  the  property  is  damaged  to  such  an  extent  that  the  cost 
of  repairs  will  equal  or  exceed  the  value  of  the  property  when 
repaired.  This,  however,  is  the  English  view.  American 
courts  have  defined  it  as  being  a  case  where  the  cost  of  re- 
pairs is  greater  than  50  per  cent  of  the  value  when  repaired, 
a  definition  much  more  favorable  to  the  insured. 

In  theory  and  in  law,  actual  and  constructive  total  losses 
must  be  sharply  distinguished.  In  cases  of  constructive  total 
loss  the  insured  must  give  the  underwriter  notice  of  abandon- 
ment in  order  to  claim  a  total  loss.  Abandonment  means  that 
the  insured  offers  the  insurance  company  what  remains  of  his 
rights  in  and  respecting  the  damaged  property  in  return  for 
the  payment  of  a  total  loss.  Notice  of  abandonment  is  the 
notice  to  the  underwriter  of  the  offer.  No  such  principle  ex- 
ists in  other  forms  of  insurance,  where  the  company  always 
has  the  privilege  of  paying  the  amount  of  the  damage  or  of 
repairing  the  property.  The  notice  of  abandonment  must  be 
definitely  expressed  without  reservations  but  the  underwriter 
has  the  privilege  of  accepting  the  abandonment,  which  puts 
the  insured  in  the  same  position  as  if  he  had  suffered  an  actual 
total  loss,  or  the  underwriter  may  reject  the  abandonment. 
In  the  latter  case  the  insured  may  either  sue  the  underwriter 
for  a  total  loss  settlement  and  leave  the  justification  of  the 
abandonment  to  be  determined  by  the  courts,  or  he  may  agree 
to  settle  as  for  a  partial  loss.  If  the  underwriter  accepts  the 
abandonment  he  pays  the  full  insured  value — either  the  in- 
surable value  in  the  case  of  an  open  policy  or  the  policy  valua- 
tion in  a  valued  policy — and  is  subrogated  to  all  the  rights 
of  the  insured. 

It  is  desirable  to  refer  briefly  at  this  point  to  the  applica- 
tions of  coinsurance  in  marine  insurance.  In  fire  insurance 
a  coinsurance  clause  requiring  Insurance  to  the  extent  of  80 
per  cent  of  the  value  is  quite  common,  and  under  such  a  clause 


MARINE  INSURANCE  285 

the  insured  becomes  his  own  insurer  to  the  extent  that  he 
insures  for  less  than  the  required  amount.  The  higher  the 
requirement  the  lower  the  rate,  however,,  for  reasons  which 
have  been  previously  enumerated.  In  marine  insurance,  on  the 
other  hand,  insurance  to  the  extent  of  100  per  cent  of  the 
value  is  required,  and  if  less  is  taken  the  company  will  pay 
a  loss  only  in  the  proportion  that  the  insurance  taken  bears 
to  the  amount  required.  Thus  90  per  cent  insurance  means 
that  the  insured  can  recover  no  more  than  90  per  cent  of  any 
loss.  The  insertion  of  such  a  requirement  in  the  marine  policy 
is  unnecessary  either  in  the  United  States  or  England,  for 
the  principle  is  well  established  In  law.  It  will  be  understood 
in  the  discussion  hereafter,  therefore,  that  the  insured  has 
insured  his  property  for  the  full  value  and  that  if  he  has  not, 
he  can  recover  only  on  the  above-mentioned  basis. 

b.  Partial  losses. — The  great  majority  of  losses  do  not 
fall  in  the  preceding  category;  they  are  only  partial  in  ex- 
tent. A  partial  loss  may  be  either  a  general  average  loss  or 
a  particular  average  loss;  but  that  need  not  concern  us  here, 
being  more  important  in  maritime  law  than  In  marine  insur- 
ance. We  have  thus  far  been  referring  to  the  results  of  dis- 
asters exclusively  as  "losses,"  but  It  is  now  advisable  to 
distinguish  two  groups  of  results  as  (1)  losses  and  (2)  ex- 
penditures, for  there  are  certain  expenditures  which  the  In- 
sured is  able  to  recover  from  the  underwriter.  Such  partial 
loss  or  expenditures  may  be  Incurred  with  respect  to  cargo, 
vessel  or  freight,  and  the  different  principles  of  settlement 
in  these  cases  make  separate  discussions  necessary. 

c.  Partial  loss  of  cargo. — This  may  be  manifested  as  a 
deterioration  In  quality  or  as  a  loss  of  part  of  the  cargo. 
The  two  bases  of  the  underwriter's  liability  for  such  losses 
are  (1)  the  percentage  of  damage  suffered  and  (2)  the  sum 
insured.  To  Illustrate  the  significance  of  these  bases,  let  us 
assume  that  a  quantity  of  cotton  is  shipped  and  insured  under 
a  valued  policy  for  $10,000,  Its  full  value.  The  cotton  is  dam- 
aged 20  per  cent  during  the  voyage;  In  addition,  the  market 
value  of  cotton  has  declined.  If  the  cotton  had  arrived  un- 
injured, It  would  have  sold  for  only  $8,000,  due  to  the  decline 
in  market  values;  In  Its  damaged  condition  It  sells  for  only 
$6,400.  It  Is  by  this  comparison  of  sound  and  damaged  values 
at  destination,  in  fact,  that  the  extent  of  damage  Is  ascer- 
tained.    It  might  seem  that  the  extent  of  the  partial  loss  could 


286    INSURANCE  PRINCIPLES  AND  PRACTICES 

be  arrived  at  in  this  way:  $10,000  was  the  value  insured 
and  the  cargo  is  now  worth  only  $6,400;  therefore  the  in- 
surance company  is -liable  for  $3,600,  the  difference.  But  this 
is  making  the  insurance  company  responsible  for  the  decline 
in  market  value,  which  is  not  a  risk  insured  against.  The 
correct  method  of  settlement  is  as  follows :  The  sound  value 
at  destination  was  $8,000  and  the  damaged  value  at  destina- 
tion $6,400;  therefore  the  extent  of  the  loss  ocurring  on  the 
seas  was  $1,600,  or  a  20  per  cent  damage.  Applying  this 
percentage  to  the  amount  insured,  or  $10,000,  we  get  $2,000 
as  the  company's  liability.  A  series  of  examples  would  serve 
to  show  that  the  method  explained  is  the  only  one  which 
eliminates  the  effects  of  fluctuations  in  market  values.  Further- 
more, it  has  been  supported  by  court  decisions.  In  compar- 
ing the  sound  and  damaged  values  at  destination  the  gross 
values  are  to  be  taken,  including  freight,  as  otherwise  the 
constant  value  of  the  freight  would  affect  the  amount  recov- 
ered by  the  insured. 

Where  the  loss  is  a  total  loss  of  part  of  the  cargo,  instead 
of  a  general  deterioration  in  condition,  the  damage  is  usually 
more  easily  ascertained.  For  example,  if  1,000  bales  of  cotton 
are  insured  for  $50,000,  and  100  are  totally  destroyed  or 
must  be  sold  short  of  destination,  the  loss  is  obviously  10  per 
cent  of  the  amount  insured. 

It  is  essential  at  this  point  to  consider  the  limitations  placed 
upon  the  payment  of  partial  losses  by  the  insurance  com- 
pany. One  of  the  most  common  is  the  memorandum  clause^^ 
which  provides  that  certain  articles  are  insured  against  general 
average  losses  and  total  losses  only.  Certain  other  articles 
are  covered  only  for  partial  losses  equal  to  20  per  cent  of  the 
value  of  the  articles  or  more.  On  still  other  articles,  the 
underwriter  is  liable  only  for  losses  amounting  to  7  and  10 
per  cent,  respectively.  The  greater  the  susceptibility  to  dam- 
age, in  general,  the  higher  the  percentage  named.  The  clause 
also  provides  that  profits  are  to  be  subject  to  the  same  per- 
centum  of  partial  loss  as  goods.  Furthermore,  the  under- 
writer relieves  himself  of  liability  for  goods  shipped  "on 
deck,"  and  for  loss  to  certain  kinds  of  goods  carried  under  deck, 
except  by  actual  contact  of  sea  water.  Ordinary  leakage 
of  liquid  cargoes  is  also  exempted.  It  should  be  explained 
that  the  clause  does  not  mean  that  the  insured  bears,  say,  10 

**  See  Appendix  LXII. 


MARINE  INSURANCE  287 

per  cent  of  every  loss  himself.  For  losses  which  do  not  reach 
10  per  cent  of  the  value,  it  is  true,  the  underwriter  pays  noth- 
ing; but  on  losses  which  reach  or  exceed  the  percentage  named 
the  underwriter  pays  the  full  loss.  The  percentage  is  there- 
fore simply  an  arbitrary  limit  marking  off  the  minor  from  the 
important  losses.  The  clause  has  two  purposes  or  results. 
First,  it  enables  a  much  lower  premium  to  be  quoted,  because 
the  multitude  of  small  losses  which  aggregate  a  considerable 
sum  are  eliminated  from  consideration  on  the  theory  that 
they  can  be  covered  by  an  addition  to  the  selling  price  of  the 
goods,  while  premiums  are  lower  than  they  would  otherwise 
be.  Second,  it  saves  the  calculation  of  a  large  number  of 
rates  on  separate  articles,  inasmuch  as  articles  can  be  put  on 
a  common  basis  by  variations  In  the  memorandum  percentages. 

A  policy  may  contain  a  "free  of  particular  average" 
clause,^''  which  specifies  that  the  insurer  is  not  liable  for  any 
particular  average  losses,  the  insurance  except  under  certain 
conditions  being  against  total  and  general  average  losses  only. 
Two  types  of  clauses  are  in  use,  being  distinguished  as 
"F.  P.  A.  A.  C."  (American  conditions)  and  "F.  P.  A.  E.  C." 
(English  conditions).  The  latter  reads  "free  of  particular 
average  unless  the  vessel  or  craft  be  stranded,  sunk,  burned 
or  in  a  collision."  The  courts  have  held  that  the  conditions 
of  the  clause  are  satisfied  if  a  stranding,  sinking,  burning  or 
collision  takes  place  at  any  time  during  the  voyage,  whether 
it  be  the  cause  of  the  loss  In  question  or  not.  The  American 
clause  reads  "free  of  particular  average  unless  caused  by 
stranding,  sinking,  burning  or  collision  with  another  vessel," 
which  wording  requires  that  the  stranding,  etc.,  be  the  cause 
of  the  loss  in  question. 

Various  modifications  of  the  memorandum  and  average 
clauses  may  be  introduced  in  order  to  fit  the  conditions  of  the 
particular  case. 

d.  Partial  loss  of  vessel. — A  vessel  is  not  ordinarily 
bought  to  be  sold  again  and  the  method  of  ascertaining  cargo 
losses  would  be  generally  Inapplicable  for  losses  on  hull. 
This  Is  the  more  evident  when  we  consider  the  size  of  the 
article,  the  fluctuations  in  Its  value  and  the  difl^culty  of  deter- 
mining a  fair  market  price.  The  ordinary  procedure,  there- 
fore, is  for  the  owners  to  have  the  necessary  repairs  made 

"  See  Appendix  XCV. 


288    INSURANCE  PRINCIPLES  AND  PRACTICES 

and  the  underwriters  pay  the  cost  thereof,  less  any  improve- 
ment to  the  owner's  property  resulting  therefrom. 

It  is  difficult  to  estimate  the  advantage  to  the  vessel-owner 
of  obtaining  new  parts  in  place  of  old  and  in  the  days  of 
wooden  vessels  this  was  arbitrarily  taken  as  one-third  of  the 
repairs.  This  was  unjust  to  new  vessels,  however,  and  the 
injustice  became  increasingly  manifest  when  metal  vessels  sup- 
planted wooden.  Modifications  of  this  principle  have 
therefore  been  introduced,  ranging  all  the  way  from  the 
elimination  of  the  one-third  deduction  down  to  a  sliding  scale  of 
deductions  varying  with  the  character  of  the  repairs  and  the  age 
of  the  vessel. 

The  settlement  of  partial  losses  is  affected  also  by  the  use 
of  average  clauses  on  hull  policies  and  clauses  providing  for 
separate  valuations  of  hull,  fittings  and  machinery.  Average 
is  frequently  made  payable  on  each  valuation,  separately  or  on 
the  whole,  whether  the  average  be  particular  or  general.  If 
the  percentage  named  be  3  per  cent,  therefore,  any  damage 
to  a  vessel  will  be  compensated  for  which  amounts  to  3 
per  cent  of  an  individual  valuation  or  any  damage  to  3  per 
cent  of  the  total  valuation.  Policies  are  also  issued  which 
protect  against  total  loss  only.  A  deductible  average  clause 
makes  the  owner  a  self-insurer  for  a  definite  sum  on  every  loss. 
On  all  steam  vessels  a  clause  is  commonly  used,  providing 
that  the  underwriter  assumes  liability  for  damage  to  the  hull 
or  machinery  resulting  from  the  negligence  of  the  master  or 
crew,  explosions,  breakage  of  shafts  or  latent  defect  of  ma- 
chinery."" Many  injuries  to  machinery  were  not,  according 
to  the  courts,  included  in  the  ordinary  perils  covered  by  the 
policy,  and  this  clause  gives  the  insured  the  benefit  of  such 
coverage. 

Instead  of  the  owner  repairing  the  vessel,  however,  he  may 
keep  the  vessel  without  repairs  or  he  may  sell  it  before  re- 
pairs are  made.  In  the  former  case,  the  amount  of  damage 
must  be  ascertained  by  a  survey  or  estimate.  If  the  vessel  is 
sold  unrepaired  the  purchase  price  is  supposed  to  measure 
the  extent  of  the  damage  and  the  insured  is  entitled  to  the 
insured  value  minus  the  amount  received  from  the  sale.  This 
latter  principle  does  not  meet  with  universal  approval,  since 
elements  are  introduced  which  are  foreign  to  the  insurance 
contract. 

*  See  Appendix  LXXXIX. 


MARINE  INSURANCE  289 

e.  Partial  loss  of  freight. — Freight,  profits,  commissions, 
etc.,  are  all  incorporated  in  the  vessel  or  cargo  and  it  is  diffi- 
cult to  conceive  of  their  loss  except  by  damage  to,  or  destruc- 
tion of,  the  tangible  property  in  which  they  are  merged.  In 
case  of  partial  loss,  the  measure  of  indemnity  is  that  propor- 
tion of  the  policy  valuation  or  insurable  value  which  the  freight 
lost  by  the  insured  is  to  the  whole  freight  at  the  insured's 
risk.  In  the  very  rare  cases  of  unvalued  policies  on  freight 
the  custom  has  been  to  adjust  losses  on  the  basis  of  the  gross, 
and  not  the  net,  freight.  The  latter  is  difficult  to  arrive  at 
because  it  is  decreasing  as  the  voyage  proceeds  as  a  result  of 
the  increasing  expenditures  incurred. 

f.  Expenditures. — Not  only  are  actual  losses  covere3  by 
the  policy,  but  also  certain  expenditures.  We  have  previously 
referred  to  certain  general  average  losses  resulting  from  vol- 
untary sacrifices.  Such  sacrifices  may  result  not  only  in  imme- 
diate loss  but  in  the  necessary  expenditure  of  funds  to  put 
the  owner  in  the  position  which  he  previously  enjoyed,  or  in 
expenditures  necessary  to  attain  the  desired  results.  For  ex- 
ample, in  attempting  to  float  a  vessel  it  may  be  necessary  to 
discharge  cargo,  fuel  and  stores,  to  store  the  same  and  later 
to  reload.  In  case  of  damage  to  the  vessel  it  may  be  neces- 
sary for  the  master  to  put  In  at  a  "port  of  refuge"  and  in  ad- 
dition to  the  cost  of  repairs,  to  spend  money  for  the  wages 
and  maintenance  of  the  crew,  port  charges,  pilotage,  discharg- 
ing and  reloading  of  cargo,  and  for  the  expenses  of  leaving 
the  port.  Such  incidental  and  "port  of  refuge"  expenses  are 
called  "general  average  expenditures"  and  form  part  of  the 
general  average  "loss."  They  must,  of  course,  be  expendi- 
tures directed  toward  the  same  end  as  the  voluntary  sacri- 
fice and  not  unnecessary  expenditures  for  the  benefit  of  some 
particular   interest. 

The  policy  also  contains  a  so-called  "sue  and  labor  clause.""^ 
According  to  this  it  is  necessary  for  the  insured  and  his  rep- 
resentatives to  "sue,  labor  and  travel  for,  in  and  about  the 
defence,  safeguard  and  recovery  of  the  said  goods  and  mer- 
chandises," in  order  to  limit  or  reduce  the  loss  incurred.  In- 
asmuch as  the  insured's  efforts  are  for  the  benefit  of  the  under- 
writer the  latter  agrees  that  anything  the  insured  may  do 
in  this  connection  shall  not  in  any  way  prejudice  his  rights 
respecting  the  insurance,  and  that  the  underwriter  will  reim- 

"  See  Appendix  LXIII. 


290    INSURANCE  PRINCIPLES  AND  PRACTICES 

burse  the  insured  for  any  expenditures  incurred  in  this  effort, 
in  proportion  as  he  is  insured.  Such  expenditures  are  termed 
"sue  and  labor  charges"  and  it  is  important  to  note  that  ( 1 ) 
unhke  general  average  expenditures,  they  must  be  for  the  benefit 
of  the  particular  property  covered  by  the  policy,  and  (2)  that 
they  must  be  expended  to  avert  some  peril  which  is  covered 
by  the  policy. 

It  Is  a  maritime  custom  that  any  person  who  rescues  prop- 
erty on  the  sea  from  damage  or  destruction  is  entitled  to  a 
reward  from  Its  owner.  If  the  salvor  and  the  owner  are  un- 
able to  agree  upon  a  suitable  reward  the  amount  thereof  is 
fixed  by  an  admiralty  court.  The  salvage  of  a  vessel  or  cargo 
is  necessarily  an  act  which  benefits  the  underwriter  and  the 
reward  or  "salvage"  paid  is  an  expenditure  for  his  benefit. 
As  sue  and  labor  charges  are  expenditures  by  the  owner  to 
save  property  for  the  underwriter,  so  salvage  is  payment  by 
the  owner  to  another  for  saving  property  for  the  underwriter; 
and  for  salvage  expenditures,  like  sue  and  labor  charges,  the 
underwriter  is  responsible. 

We  referred  above  to  the  loss  resulting  from  a  collision 
of  vessels.  A  legal  liability  may  also  arise  from  this  event. 
Let  us  suppose  that  vessel  "A,"  valued  at  $100,000,  collides 
with  vessel  "B,"  valued  at  $200,000  and,  as  a  result,  vessel 
"A"  Is  injured  to  the  extent  of  $20,000  and  vessel  "B"  to  the 
extent  of  $10,000.  If  vessel  "A"  is  entirely  responsible  for  the 
accident  the  owner  of  vessel  "B"  may  recover  damages  from 
Its  owner  equal  to  the  damage  "B"  has  sustained.  Such  legal 
liability  Is  not  one  of  the  ordinary  marine  perils  against  which 
the  policy  protects,  although  the  damage  suffered  by  "A's" 
vessel  is  covered  by  the  policy  issued  by  "A's"  underwriter. 
To  put  It  in  another  way,  "A's"  policy  protects  him  against 
damage  suffered  but  not  against  legal  liability  for  damage 
done.  It  is  customary  to  add  a  clause  to  the  policy,  however, 
protecting  against  such  legal  liability.^^  The  underwriters 
under  such  a  clause  agree  that  ( 1 )  they  will  be  responsible  for 
such  legal  liabilities,  (2)  they  will  pay  the  expense  of  contest- 
ing the  claim.  If  a  contest  Is  desirable,  and  (3)  where  both 
vessels  are  responsible  for  the  accident,  the  respective  legal 
liabilities  shall  be  settled  on  the  basis  of  cross-liabilities.  To 
illustrate  the  latter  agreement  let  us  suppose  that  the  two 
vessels  are  equally  responsible  for  the  accident,  with  conse- 

"'  See  Appendix  LXIII. 


MARINE  INSURANCE  291 

quent  equal  legal  liability.  The  underwriters  pay  the  dam- 
ages sustained  and  assume  the  rights  of  the  insured  parties. 
Underwriter  "A"  pays  "A"  $20,000  and  assumes  "A's" 
rights  against  "B,"  and  underwriter  "B"  pays  "B"  $10,000 
and  assumes  "B's"  rights  against  "A."  Vessel  "A"  was  re- 
sponsible for  one-half  of  the  damage  to  "B"  or  one-half  of 
$10,000.  Underwriter  "A"  is  therefore  responsible  to  under- 
writer "B"  for  $5,000.  Vessel  "B"  was  responsible  for  one- 
half  of  the  damage  to  "A"  or  one-half  of  $20,000;  under- 
writer "B"  is  therefore  responsible  to  underwriter  "A"  for 
$10,000.  "Crossing"  these  liabilities  or  setting  one  off 
against  the  other,  underwriter  "B"  is  responsible  to  under- 
writer "A"  for  the  net  sum  of  $5,000.  There  is,  therefore, 
another  expenditure  for  which  marine  underwriters  are  liable 
under  the  collision  clause,  that  is,  the  expenditure  necessary 
to  satisfy  a  legal  liability. 

Marine  insurance  rates. — Although  the  factors  which  affect 
marine  insurance  rates  seldom  operate  separately  but  usually 
modify  and  exaggerate  others  by  association,  it  is  conve- 
nient for  purposes  of  study  to  divide  them,  as  far  as  possible, 
into  groups.  We  will  consider,  therefore,  these  factors  in 
their  relation  to  the  following  topics:  the  subjects  of  insur- 
ance, the  Insured,  the  nature  of  the  trade  involved,  the  results 
revealed  by  statistics,  the  various  phases  of  competition,  the 
policy  conditions  and  finally,  the  extent  to  which  judgment  is  a 
factor. 

The  subjects  of  insurance. — 1.  The  type  of  vessel. — As  the 
means  of  transportation,  the  vessel  must  necessarily  occupy 
an  important  place  in  the  making  of  rates.  Size,  type,  adapt- 
ability to  the  trade,  motive  power,  material  and  structural 
strength  are  always  given  consideration.  It  is  evident  that 
wooden  and  steel  vessels  must  differ  considerably  in  hazard, 
that  large  vessels  are  less  subject  to  certain  perils  and  more 
subject  to  others  and  that,  in  strength,  vessels  will  vary  as 
much  as  individuals;  but  space  will  not  permit  of  a  discussion 
in  detail  of  various  types  of  vessels  and  their  uscs."^  To  some 
extent  the  underwriter  will  be  guided  by  the  results  which 
are  arrived  at  by  prominent  classification  societies  formed  for 
the  purpose  of  testing  and  surveying  vessels  and  reporting 
upon  their  strength  and  condition  as,  for  example,  Lloyds' 
"  See  Robert  Riegel,  "Merchant  Vessels,"  D.  Appleton  &  Co.,  N.  Y.  1921 


292    INSURANCE  PRINCIPLES  AND  PRACTICES 

Register  and  the  Register  of  the  American  Bureau."*  These 
are  especially  valuable  when  risks  are  offered  which  cannot  be 
personally  inspected. 

2.  The  class  of  commodity. — In  both  hull  and  cargo  in- 
surance the  cargo  is  an  important  consideration.  Innum- 
erable conditions  must  necessarily  be  taken  into  consideration, 
such  as  the  processes  to  which  the  commodity  has  been 
subjected,  its  susceptibility  to  odor,  moisture,  weather  condi- 
tions, etc.,  the  method  of  packing,  inherent  vice  and  necessity 
for  proper  loading.  For  example,  cocoa  and  coffee  beans  may 
be  easily  affected  by  moisture,  grain  affords  problems  of  load- 
ing, fiber  products  are  subject  to  spontaneous  combustion, 
hides  deteriorate  rapidly,  and  so  on  ad  infinitum. 

The  insured: — 1.  The  personal  factor. — Underwriters  in- 
sist that  they  insure  persons  rather  than  property,  in  the  sense 
that  the  rate  must  vary  with  the  individual.  As  between  two 
individuals  engaged  in  the  same  trade  on  the  same  route  and 
using  practically  identical  vessels,  one  individual  account  will 
show  an  underwriting  profit  while  another  is  a  loss.  Due  to 
carelessness  or  incompetence  one  shipper  is  constantly  pre- 
senting claims  which  occur  but  rarely  in  the  other  case.  Like- 
wise, of  two  vessel-owners  in  the  same  trade  with  similar  ships, 
one  devotes  considerably  more  money  to  maintenance  and  or- 
ganization and  exercises  a  more  careful  supervision,  with  a 
resultant  saving  in  losses.  Naturally,  also,  an  underwriter 
is  more  willing  to  make  a  reduction  in  the  case  of  an  account 
which  he  has  carried  profitably  for  many  years  than  he  would 
be  for  a  new  customer  whose  business  may  or  may  not  yield 
a  profit.  In  addition,  a  moral  hazard  may  have  to  be  taken 
Into  consideration.  Some  shippers  persist  in  making  unfair 
claims  for  losses,  others  do  not  furnish  the  information  neces- 
sary to  make  a  fair  estimate  of  hazard,  and  at  the  extreme 
are  those  who  practice  positive  deception  and  fraud. 

2.  Brokers'  accounts. — As  the  underwriter  relies  to  some 
extent  upon  his  past  experience  with  shippers,  so  also  must  he 
place  some  dependency  upon  his  past  experience  with  brokers. 
Accounts  with  some  brokers  will  show  far  less  benefit  to  the 
underwriter  than  others  and  there  will  naturally  be  some  dis- 
crimination against  the  business  offered  by  them. 

3.  Nationality. — Experience  has  shown  that  hazards  of 
navigation  vary  with  the  nationality  of  the  vessel  and  the  crew, 

"7iii,  chap.  13. 


MARINE  INSURANCE  293 

some  nations  seeming  to  produce,  on  the  average,  persons 
who  are  far  better  fitted  to  engage  in  ocean  trade  and  vessel 
operation  than  others.  The  standard  of  business  honor  will 
also  vary  greatly,  thus  affecting  the  decision  on  the  acceptance 
of   risks   and   the   adjustment   of   losses. 

Nature  of  the  trade: — 1.  Natural  forces  and  topography. 
— Experience  as  well  as  deductive  reasoning  shows  that  certain 
geographic  regions  and  trade  routes  offer  hazards  which  are 
non-existent  or  modified  in  others.  Thus,  off  the  British  Isles 
and  Newfoundland,  fogs  are  prevalent;  the  northern  waters 
contain  floating  ice;  in  the  Baltic  Sea,  the  nights  are  longer; 
river  harbors  frequently  have  bars  or  shallows;  the  typhoons 
of  the  Pacific  and  the  monsoons  of  the  Indian  Ocean  are  pro- 
verbial ;  many  regions  are  far  better  equipped  with  aids  to  navi- 
gation than  others,  and  the  conditions  of  ports  vary  as  greatly 
as  those  of  vessels,  cargoes  and  individuals.  As  a  result,  no 
matter  what  the  vessel  or  cargo,  the  trade  route  and  geo- 
graphic region  will  exert  an  influence  on  the  rate. 

2.  Seasons. — The  seasons  of  the  year  and  the  business 
"seasons"  both  affect  the  rate.  The  influence  of  winter  is  too 
obvious  to  require  more  than  mention;  the  cotton  movement 
in  the  South  tends  to  a  congestion  at  shipping  ports  and  this  in- 
creases the  danger  from  fire  and  bad  weather.  Seasonal  de- 
mands for  tonnage  will  attract  vessels  to  trades  for  which  they 
are  little  suited.  Temperature  may  be  an  important  element 
in  shipments  of  oil  and  grease. 

3.  Trade  customs. — The  underwriter.  In  order  to  form 
satisfactory  judgments  of  risks  offered,  must  be  acquainted 
with  the  world's  commerce.  Thus,  cotton  is  shipped  from 
Egypt  in  small  bales  well  wrapped  while  American  exports 
of  this  commodity  are  frequently  inadequately  protected  and 
often  poorly  baled.  At  some  ports  cargoes  are  unloaded  di- 
rectly on  the  wharf  or  pier,  while  at  others  lighterage  is  used. 
Rubber  may  be  shipped  from  Brazil  unpacked;  the  same 
product  comes  from  Eastern  countries  carefully  packed. 

Statistical  experience. — Many  of  the  elements  in  a  marine 
rate  cannot  be  measured  in  figures  but  in  some  cases  the  ex- 
perience acquired  by  years  of  operation  is  sufl^ciently  broad  to 
afford  some  basis  for  judgment.  Many  companies,  therefore, 
maintain  statistical  departments  designed  to  furnish  material 
which  the  underwriter  may  use  to  assist  his  general  knowledge. 
With  respect  to  this  information  the  marine  insurance  busi- 


294    INSURANCE  PRINCIPLES  AND  PRACTICES 

ness  is  in  about  the  stage  which  fire  insurance  apparently  finds  it 
so  diflficult  to  pass  through,  a  stage  in  which  the  information  is 
regarded  as  a  trade  secret  of  very  great  value.  There  is,  in 
other  words,  very  little  exchange  of  information  between  un- 
derwriters, in  spite  of  the  mutual  benefit  which  such  co- 
operation, intelligently  carried  out,  would  give.  As  expressed 
by  a  practical  insurance  man,  "that  is  the  unfortunate  feature 
of  the  marine  insurance  business  to-day.  There  is  no  confer- 
ence between  the  companies  on  the  very  important  lines  of 
business.  It  is  the  one  disability  and  perhaps  the  one  vice 
of  the  marine  insurance  business — that  we,  each  one  of  us, 
keep  our  own  records  and  keep  our  own  counsel  and  under- 
write along  our  own  individual  lines." 

Competition. —  1.  An  international  market. — There  is  prac- 
tically no  cooperation  between  the  various  marine  insurance 
markets  of  the  world  in  regard  to  rates,  and  as  a  result  of 
the  cable  facilities  which  exist  and  the  intangible  character  of 
the  commodity  dealt  in,  the  insurance  may  be  readily  "ex- 
ported." This  means  that  the  buyer  may  obtain  his  insurance 
abroad  if  he  finds  a  sufficient  inducement,  and  that  the 
American  underwriter  must  meet  the  competition  of  foreign 
underwriters.  An  investigation  has  shown  that  perhaps  20 
per  cent  of  the  premiums  on  American  business  has  gone  to 
unadmitted  companies  and  foreign  underwriters,  while  the 
proportion  in  the  hull  insurance  field  was  as  high  as  50  per 
cent.  The  broker,  ordinarily  anxious  to  do  well  for  his  client, 
seeks  the  best  market. 

2.  Brokers'  accounts. — Since  brokers  occasionally  follow 
the  practice  of  combining  risks  and  offering  them  as  a  whole, 
insurance  companies  are  sometimes  inclined,  because  of  com- 
petition, to  give  better  terms  than  could  have  been  obtained  on 
the  individual  units  in  the  groups. 

3.  Rate  agreements. — Unlike  fire  insurance,  rate  agree- 
ments in  marine  insurance  have  been  confined  to  limited  classes 
of  business.  This  is  partially  accomplished  through  the  me- 
dium of  underwriters'  associations,  which  promulgate  rates 
which  are  purely  advisory  in  character  and  which  the  com- 
panies are  free  to  use  or  not  as  found  desirable.  In  practice, 
of  course,  such  rates  are  quite  generally  adopted.  The  or- 
ganization of  such  associations,  eight  of  which  recommend 
rates,  is  much  more  informal  than  the  organization  of  fire 
underwriters'  associations.     A  second  method  by  which  uni- 


MARINE  INSURANCE  295 

formlty  In  rates  on  certain  commodities  Is  arrived  at  is  through 
reinsurance  exchanges,  where  companies  exchange  business 
which  is  written  at  agreed-upon  rates.  As  instances,  there 
may  be  cited  the  "Cotton  Reinsurance  Agreement,"  the  "Cot- 
ton Fire  and  Marine  Underwriters,"  the  "Burlap  Agree- 
ment," "Joint  Grain  Certificates,"  "Lumber  Reinsurance 
Association,"  "Inland  River  Agreement,"  and  "New  Orleans 
River  Association."  While  the  underwriters'  associations  are 
principally  concerned  with  rates  on  hulls,  the  agreements 
relate  primarily  to  cargo  risks. 

Policy  conditions. — It  has  previously  been  explained  that 
various  arrangements  may  be  made  to  adapt  the  insurance 
to  the  vessel  or  commodities  to  be  covered  and  that  the  ordin- 
ary provisions  of  the  policy  are  generally  modified  by  special 
agreements  and  clauses.  The  underwriter's  liability  is  thereby 
extended  or  reduced  and  naturally  the  rate  varies  In  accord- 
ance with  this  fact.  Obviously  the  hazard  Is  Increased  con- 
siderably by  the  addition  of  a  "warehouse  to  warehouse 
clause,"  and  greatly  reduced  by  restricting  coverage  to  total 
losses  only.  It  is  impossible  and  unnecessary  to  enumerate 
all  the  possible  variations  and  their  effects."^ 

Underwriting  judgment. — Finally,  when  we  come  to  the  end 
of  the  specific  factors  which  have  been  enumerated  there 
remains  an  interminable  list  of  unclassified,  unanalyzed  and 
untabulated  considerations  to  which  only  an  underwriter's 
experience  can  enable  him  to  give  proper  weight.  The  ability 
to  evaluate  properly  these  considerations  and  to  apply  them 
to  specific  cases  is  commonly  called  "underwriting  judgment." 
Indescribable,  yet  clearly  recognized,  it  has  enabled  some  in- 
dividuals to  obtain  positions  of  preeminence  in  this  respect,  so 
that  testimony  shows  that  their  acceptance  of  a  risk  is  sufli- 
cient  to  induce  others  to  write  on  the  same  risk.  This  factor 
is  present  to  some  extent  in  all  forms  of  insurance  rate- 
making.  It  would  be  possible  to  construct  a  list  in  which  the 
various  forms  of  insurance  were  arranged  in  order  as  they 
depended  upon  underwriting  judgment  as  contrasted  with  sta- 
tistics. Among  those  at  the  head  of  the  list  would  appear 
marine  insurance  and  at  the  bottom  of  the  list  life  insurance. 
Underwriting  judgment  Is  especially  important  in  the  marine 
field  because  the  event  insured  is  uncertain,  the  hazards  are 
many  and  peculiarly  dlflUcult  to  measure  in  figures  and  co- 
operation between  underwriters  is  limited. 

"  See  appendices  LXIV  to  C. 


Part  VI 
OTHER  FORMS  OF  CASUALTY  INSURANCE 


297 


/ 


Chapter  XX 

AUTOMOBILE  INSURANCE 

Types  of  automobile  coverage  and  types  of  companies. — In 
order  to  obtain  complete  protection  the  owner  of  an  automobile 
must  have  five  types  of  policies.  For  convenience  in  discussion, 
however,  these  may  be  divided  into  three  groups; 'the  liability 
and  property  damage  forms,^the  collision  form,  and  the  fire  and^ 
theft  lorms.  The  automobile  insurance  business  is  distributed 
between  two  t^p£S_pf  companies,  the  casualty  companies  and  the 
^,Jire  companies.  In  very  few  States  is  it  possible  to  obtain  com- 
plete protection  IrTa^slngte  policy  or  company  as  the  laws  have 
been  framed  on  the  assumption  that  casualty  risks  belong  to 
casualty  companies  and  fire  risks  to  fire  companies.  Liability 
insurance  is  written  entirely  by  casualty  companies,  fire  and  theft 
insurance  entirely  by  fire  companies,  and  property  damage  and 
collision  insurance  is  divided,  casualty- companies  receiving  prob- 
ably the  bulk  of  property  damage  and  fire  companies  the  greater 
part  of  collision  insurance.  The  demand  for  complete  coverage 
In  a  single  policy  Is  not  great  and  such  as  It  Is  has  been  largely 
met  by  cooperative  companies  operating  under  substantially  simi- 
lar management,  and  issuing  combination  policies. 
r  Liability  insurance  policies.^ — Liability  insurance  Is  insur- 
/  ance  against  legal  liability  for  damages  because  of  bodily  Injury 
/  to  others  arising  out  of  the  ownership,  maintenance  or  use  of 
\an  automobile.  This  policy  also  promises  that  the  company  will 
defend  the  Insured  In  suits,  pay  legal  costs,  make  investigations 
and  settlements  of  claims  and  pay  for  Immediate  surgical  relief 
to  the  Injured.  The  policy  is  designed  to  cover  the  ordinary 
use  of  an  automobile  only  and,  therefore,  contain  limitations 
to  its  scope.  It  applies  In  the  United  States  and  Canada  only, 
unless  the  territorial  scope  Is  extended  by  an  endorsement  paid 
for  by  an  additional  premium.  In  regard  to  use,  the  Insured 
may  not  employ  a  private  passenger  car  in  carrying  passengers 
for  hire  nor  is  the  car  covered  while  towing  a  trailer,  or  while 

*  See  Appendix  CII. 

299 


300    INSURANCE  PRINCIPLES  AND  PRACTICES 

engaged  In  a  race  or  speed  contest.  It  must  be  operated  by  a 
person  who  Is  over  the  legal  age  limit.  The  company's  liability 
is  also  restricted  in  amount,  the  standard  limits  being  $5,000 
for  Injuries  to  any  one  person  in  one  accident,  and  $10,000  for 
injuries  to  more  than  one  person  in  one  accident,  subject  to  the 
$5,000  per  person  limitation.  The  standard  limits  may  be 
extended  by  the  payment  of  an  extra  premium. 

Property-damage  policies.^ — Property-damage  insurance  pro- 
tects against  injury  or  destruction  of  the  property  of  others,  in- 
cluding loss  of  use,  except  when  in  charge  of  the  person  assured 
or  his  employees,  or  when  carried  In  cars  covered  by  the  policy. 
,Such  injury  must,  of  course,  result  from  an  accident  arising  but 
of  the  ownership,  maintenance  or  use  of  the  cars  covered  by 
the  policy.  Loss  by  fire  from  any  cause  Is  not  covered.  Prac- 
tically the  same  limitations  apply  to  the  property-damage  policy 
as  to  the  liability  policy.  The  liability  of  the  Insurer  Is  limited 
to  the  actual  cash  value  of  the  property  destroyed  or  Injured,  up 
to  the  ordinary  limit  of  $1,000,  which  may  be  extended  by  an 
additional  premium.  It  Is  to  be  noted  that  a  property  damage 
policy  covers  loss  of  use.  Thus,  the  insured  may  not  only  be 
legally  liable  to  another  for  damaging  his  property  but  also  for 
the  pecuniary  loss  resulting  from  the  fact  that  the  Injured  party 
Is  deprived  of  the  use  of  the  damaged  property  while  it  Is  under- 
going repairs.  The  property-damage  policy  is  never  separate 
but  is  written  concurrently  vv^th  public  liability  or  fire  coverage 
I       by  a  combination  policy  or  by  endorsement. 

Liability  and  property  damage  rates.-^ 

A.  Private  passenger  cars. — The  rate-making  system  may 
be  divided  into  the  various  factors  which  influence  the  making 
of  a  rate.*  Rates  for  all  forms  of  automobile  insurance  are 
unstable  and  It  is  doubtful  how  long  the  figures  used  below  as 
illustrations  will  continue  In  force.  The  system  of  arriving  at 
premiums  is  discussed  under  the  following  heads: 

1.  Territory. — The  United  States  has  been  divided  into 
eight  territories,  numbered  from  one  to  eight,  and  ranging 
from  the  most  hazardous  communities  to  rural  sections.  Thus, 
territory  No.  1  is  New  York  City,  where  Injuries  to  both  per- 
sons and  property  are  most  frequent  and  severe.  Using  as  an 
illustration  a  medium-priced  car,  costing  $1,495,  the  rates  in 

^  See  Appendix  CV. 

'*  Rates   show   relatively  frequent  changes.     Appendices  CX   and  CXI  show 
recent  rates. 
'  See  rate  forms,  Appendices  CX,  CXI  and  CXII. 


AUTOMOBILE  INSURANCE  301 

this  territory  are  found  to  be  $103  for  pr'olic  liability  and  $28. 
50  for  property  damage.  In  territory  r>  o.  2,  including  the  sub- 
urbs of  New  York  City,  these  rates  decline  to  $57.50  and  $16 
respectively;  in  Philadelphia  (thirf^i-class  territory),  they  are 
reduced  to  $48  and  $15  rcspectiviely ;  and  in  strictly  rural  and 
sparsely  settled  localities  (teri'itory  No.  8)  they  are  as  low  as 
$19  for  public  liability  and,  $7  for  property  damage  insurance/ 
For  the  sake  of  illustration  a  particular  car  has  been  used,  but 
it  is  understood  that/other  makes  have  different  rates,  since  the 
list  price  of  the  A'tir  is  a  factor. 

The  territon^ial  grouping  described  is  based  principally  upon 
two  factors*":  ( 1 )  The  population  density  of  the  particular  terri- 
toriec  andi  (2)  the  past  experience  as  reflected  by  compiled  sta- 
tistics, ^'in  collecting  statistics  of  experience  it  has  not  always 
been  'possible  to  classify  the  data  in  as  detailed  a  manner  as  de- 
siraKjle.     In  localities  where  there  are  comparatively  few  cars 
anr'i  few  losses  it  has-been  found  necessary  to  proceed  on  the  as- 
si  ftmption  that  what  is  true  of  automobiles  in  the  aggregate  is 
t  rue  of  particular  kinds  of  cars.     This  of  course  is  not  always 
strictly  accurate,  but  the  difficulty  is  partly  obviated  by  the  con- 
stantly Increasing  amount  of  statistics.      Furthermore,  except 
as  reflected  In  the  statistics,  the  territorial  grouping  cannot  take 
Into  account  such  factors  as  road  conditions,  topography,  char- 
acter of  population  and  the  local  laws  affecting  accidents.  Like- 
wise, the  drawing  of  lines  delimiting  territorial  zones  necessa- 
rily must  discriminate  IllogIc,;/ily  between  two  communities  lying 
close  to  and  on  opposite  sides  of  the  line. 

2.  Type  of  car. — Since  It  is  apparent  that  different  cars  will 
present  varying  degrees  of  hazards,  it  has  been  found  necessary 
to  create  four  classes  of  automobiles.  The  "private  passenger" 
car  is  one  used  only  for  personal  and  business  calls.  "Public 
automobiles"  consist  of  "livery"  vehicles  rented  by  the  hour  and 
day  and  "other  than  livery"  vehicles,  including  taxicabs,  etc. 
"Commercial"  vehicles  Include  principally  cars  used  for  delivery 
purposes  and  trucks.  "Manufacturers'  and  dealers'  cars"  are 
those  in  the  possession  of  manufacturers  and  dealers  for  demon- 
strating purposes.  Separate  rates  are  made  for  each  of  these 
classes  of  cars.  Thus,  while  a  Buick  in  territory  No.  1  might 
cost  $103  for  liability  insurance  and  $28.50  for  property  dam- 
age Insurance,  a  livery  vehicle  would  cost  $270  and  $50  re- 
spectively, a  taxicab  $480  and  $120  respectively,  and  a  coal 

*  Rates  are  given  in  this  order  hereafter  where  not  otherwise  specified. 


\ 


302    INSURANCE  PRINCIPLES  AND  PRACTICES 

dealer's  heavy  wagoi?  $340  and  $120  respectively.  Manufac- 
turers' and  dealers'  cars  are  usually  rated  on  a  different  basis. 
These  rates  for  different  kinds  of  cars  are  based  upon  the  vary- 
ing ratios  of  losses  to  in^surance  as  shown  by  the  statistics 
compiled.  i 

3.  Motive  power. — Since  i*:he  electric  car  and  the  motor- 
cycle present  smaller  degrees  of  hazard  they  are  written  at  a 
reduction  from  the  premiums  charged  Spr  gasoline  cars.  Using 
as  an  illustration  the  Buick  previously  rerfeirred  to  in  New  York 
territory  the  rates  would  be  $103  for  liability  insurance  and 
$28.50  for  property  damage  insurance,  while  eK'^ctric  cars  and 
motorcycles  would  have  a  liability  rate  of  only  $2^2.50  and  a 
property  damage  rate  of  $6.00.  It  is  to  be  noted  tK^'at  we  arc 
here  using  a  private  pleasure  car  of  a  particular  make  in  a  given 
territory  as  an  illustration.  Similar  allowances  are  macde  for 
electricity  as  motive  power  In  public,  commercial,  manufa  ctur- 
ers'  and  dealers'  cars.  \ 

4.  List  price.^ — Under  the  previous  rating  system,  vario  us 
makes  of  cars  were  distinguished  principally  upon  the  basis  o^f 
horse-power.      It   was   found,   however,   that   this   resulted   in\ 
many  criticisms.     It  was  argued  that  the  legal  limitation  of  the 
speed  of  a  car  made  the  potential  horse-power  of  minor  consid- 
eration, that  higher-powered  cars  were  better  operated  and  that 
the  indicated  horse-power  as  obtained  by  a  formula  was  fre- 
quently inaccurate,   resulting  in  absurd   discrepancies  between 
well-known  cars.    As  a  result  the  list  price  has  been  substituted 
as  a  basis  and  cars  divided  into  four  groups  partly  on  the  basis 
of  list  price  and  partly  on  the  basis  of  experience.     These  four 
groups  in  New  York  territory  have  rates  as  follows : 

Property  Damage 
Group  Liability  Rate  Rate 

W    $88.00  $24.00 

X     103.00  28.50 

Y     119.00  33.00 

Z    134.00  37.00 

5.  Use  of  the  automobile. — The  manual  rates  above  re- 
ferred to  apply  to  private  passenger  cars  used  for  private  use 
and  business  calls.  In  territories  Nos.  1  to  6,  if  the  insured  is 
willing  to  omit  the  business  calls  and  restrict  the  car  to  private 

''See  list  of  automobiles,  Appendix  CXII, 


AUTOMOBILE  INSURANCE  303 

use,  8  per  cent  reduction  in  liability  and  property  damage  rates 
is  given, ^* 

6.  Driver  of  the  automobile. — The  policy  at  the  rates 
above  quoted  contains  an  omnibus  coverage  provision  allowing 
the  car  to  be  driven  by  any  person  having  the  insured's  permis- 
sion. If,  however,  the  insured  warrants  that  the  car  will  be 
driven  only  by  the  owner,  20  per  cent  reduction  in  liability  and 
property  damage  rates  is  allowed.^* 

7.  Limits. — The  standard  limitations  for  liability  insur- 
ance are  $5,000  and  $10,000.  These  rates,  however,  may  be 
varied  to  suit  the  needs  of  the  insured  and  higher  limits  may  be 
obtained  by  the  payment  of  an  extra  premium.  Thus,  limits  of 
$10,000  and  $20,000  may  be  obtained  at  120  per  cent  of  the 
manual  rate.  The  usual  property  damage  limit  is  $1,000  but 
this  may  be  extended  and  a  $5,000  limit,  for  example,  may  be 
obtained  for  130  per  cent  of  the  manual  rate. 

8.  Persons  covered. — The  coverage  of  the  liability  policy 
extends  only  to  the  public;  damages  payable  to  injured  work- 
men are  not  recoverable.  In  States  where  this  is  important, 
employer's  liability  protection  may  be  obtained  by  the  payment 
of  an  extra  premium. 

9.  Foreign  coverage. — If  a  tourist  desires  to  obtain  a 
policy  applying  outside  of  the  United  States  and  Canada,  he 
may  obtain  foreign  liability,  property  damage,  and  collision 
coverage  for  an  extra  premium. 

B.  Public  automobiles. — These  cars  are  divided  into  two 
groups,  "livery"  vehicles  and  "other  than  livery"  vehicles,  the 
former  group  including  principally  cars  occasionally  rented;  the 
second  group,  omnibuses,  taxicabs  and  sight-seeing  cars.  The 
same  territorial  divisions  apply  and  the  rates  upon  livery  vehicles 
range  from  $100  and  $20  respectively  in  the  lowest  territory, 
to  $270  and  $50  in  the  highest  territory.  Beyond  this  no  dis- 
tinction Is  made  between  livery  vehicles.  Other  than  livery  ve- 
hicles are  also  influenced  by  the  place  of  customary  use,  the 
rates  upon  a  hotel  omnibus  ranging  from  $200  and  $35  respec- 
tively in  the  lowest  territory  to  $400  and  $70  in  the  highest. 
These  public  automobiles  other  than  livery  vehicles  are  further 
distinguished  with  reference  to  their  use  and  size,  a  taxicab  in 
first-class  territory  costing  $480  and  $120  respectively,  a  public 
automobile  seating  not  more  than  twelve  persons  $480  and  $70, 

^*  Eight  per  cent  reduction  rates  are  now  described  as  "8%  restricted  cover- 
age" and  20%  reduction  rates  as  "20%  restricted  coverage"  in  contrast  with 
"basic  coverage." 


304    INSURANCE  PRINCIPLES  AND  PRACTICES 

and  a  public  automobile  seating  over  thirty  persons  $840  and 
$125  for  liability  and  property  damage  Insurance.  Employer's 
liability  protection  upon  these  forms  of  cars  costs  $5. 

C.  Commercial  cars. — The  same  territorial  grouping  Is  ap- 
plied to  commercial  cars.  Thus,  rates  on  a  five-ton  Mack  truck 
used  as  a  baggage  car  range  from  $78  and  $40  in  the  lowest 
territory  to  $415  and  $150  In  the  highest.  Motorcycles  cost 
$90  and  $32  in  first-class  territory  and  in  third-class  territory 
$SS  and  $22  for  liability  and  property  damage,  respectively. 
Gasoline  commercial  cars  are  also  divided  according  to  their 
use  and  size.  Thus,  an  ambulance  costs  more  than  a  coal  deal- 
er's wagon  and  the  latter  costs  more  than  a  water  company's 
wagon.  For  the  purpose  of  distinguishing  between  the  various 
hazards  due  to  character  of  use  the  cars  are  divided  into  four 
groups  known  as  classes  1,  2,  3,  and  4.  Within  these  groups, 
cars  are  sub-divided  into  three  classes — heavy,  medium  and  light 
— on  the  basis  of  the  load  capacity.  In  first-class  territory  rates 
for  the  coal  dealer's  vehicle  for  liability  insurance  would  be  $340 
on  a  heavy  car,  $320  on  a  medium  car,  and  $290  on  a  light  car, 
while  the  property  damage  rates  are  $120,  $112  and  $100,  re- 
spectively. Electric  cars  are  written  at  a  10  per  cent  reduction 
from  the  preceding  rates.  It  is  very  important  to  notice,  how- 
ever, that  where  five  or  more  cars  are  insured  with  the  same 
company.  It  is  possible  to  obtain  rates  on  a  pay-roll  basis,  a  sys- 
tem which  is  explained  under  the  next  subdivision. 

D.  Manufacturers'  and  dealers'  cars. — These  cars,  which  are 
principally  used  for  demonstrating  purposes,  may  be  written  on 
any  one  of  three  bases,  "named  chauffeur,"  "specified  car,"  or 
"garage  pay-roll."  On  the  named  chauffeur  basis,  the  premium 
paid  by  the  dealer  depends  upon  the  number  of  chauffeurs 
specified  in  the  policy,  it  being  assumed  that  this  approximately 
measures  the  aggregate  hazard  of  his  business.  In  a  third-class 
territory  the  rates  are  $200  and  $70  lor  liability  and  property 
damage  insurance,  respectively.  On  the  specified  car  basis,  the 
/  dealer  lists  the  cars  which  are  to  be  covered  and  the  same  rates 
^pply  to  the  cars  as  apply  to  the  chauffeur.  On  the  pay- 
roll basis  it  is  similarly  assumed  that  the  wages  paid  are  an  ap- 
proximate index  of  the  aggregate  hazard  of  the  manufacturer's 
or  dealer's  business,  and  rates  are  quoted  per  $100  of  annual 
pay-roll.  The  liability  and  property  damage  for  the  first 
$10,000  of  pay-roll  are  $3.75  and  $1.25,  respectively  and  on 
the  pay-roll  above  that  figure,  $3.00  and  $1.00,  respectively. 


/ 


AUTOMOBILE  INSURANCE  305 

In  the  same  territory  the  dealer  could  obtain  protection  against 
"inside  exposure,"  which  covers  only  the  hazard  within  the 
walls  and  on  the  adjacent  drive-ways,  at  50  cents  for  liability 
and  the  same  figure  for  property  damage  protection. 

Collision  insurance  policy." — Collision  insurance  protects 
against  loss  or  damage  sustained  by  collision  of  vehicles  with  a 
moving  or  stationary  object.  It  applies  to  injuries  suffered  by 
the  Insured's  car,  and  Is  sometimes  called  a  "damage  sustained" 
policy.  The  measure  of  this  loss  is  the  actual  intrinsic  value  of 
the  property  at  the  time  of  the  loss  or  the  cost  or  repair  or  re- 
placement.    The  policy  does  not  cover  losses  by  fire,  or  loss  or 

I  damage  to  tires,  unless  caused  by  an  accident  which  Involves 
other  loss  or  damage  to  the  insured's  automobile.  The  most  lib- 

'  eral  policy  form  provides  for  the  payment  of  cash  value,  repairs, 
or  replacement  cost  in  full,  and  Is  known  as  full  coverage.   The 
following  illustrations  are  based  upon  the  full  coverage  policy. 
Collision  insurance  rates: 
A.  Private  passenger  cars. 

1 .  Territory. — The  country  Is  divided  Into  eight  territories 
as  previously  described,  the  rates  In  these  territories  on  a  new 
Class  A  car  for  full  coverage  ranging  from  $55  to  $179. 

2.  List  price. — ^Cars  are  further  classified  with  reference 
to  list  price,  twenty  classes  lettered  from  A  to  U  having  been 
created.  Using  New  York  territory  as  an  illustration,  a  Class 
A  car  with  a  list  price  of  $550  costs  $179,  a  Class  B  car  at 
$650  list  price  costs  $205,  and  a  Class  U  car  costs  $395.  The 
cost  of  repairs  on  the  higher-priced  cars  is  ordinarily  greater. 
$650  list  price  costs  $205,  and  a  Class  U  car  costs  $395. 

3.  Extent  of  coverage. — The  above  rates  apply  to  the  full 
coverage  policy.  If  the  Insured  Is  willing  to  bear  the  first  $50 
of  any  loss  himself  and  consequently  to  accept  a  $50  deductible 
average  clause,  the  rates  named  above  are  decreased  to  $46, 
$>S6  and  $237,  respectively.  If  he  Is  willing  to  pay  the  first 
$100  of  any  loss  himself  under  a  $100  deductible  average 
policy,  these  rates  become  $24,  $25  and  $171,  respectively. 

4.  Age  of  car. — Rates  named  above  are  rates  quoted  for 
ntw  cars.  As  a  car  grows  older  and  the  cost  of  repairs  and 
extent  of  possible  damage  decreases,  the  rates  are  reduced;  thus, 
on  a  car  between  six  and  eighteen  months  old,  the  rates  named 
above  will  be  considerably  reduced.  Similar  reductions  are  made 
for  second-hand  cars  in  use  from  six  to  twelve  months  since  the 

'See  Appendix   CIV. 


306    INSURANCE  PRINCIPLES  AND  PRACTICES 

date  of  original  purchase,  and  for  second-hand  cars  in  use  more 
than  twelve  months  in  the  hands  of  the  present  owner. 

5.  Motive  Power. — Electric  cars  are  written  at   10  per 
cent  discount. 

B.  Commercial  cars. — A  similar  territorial  division  is  made 
for  cars  in  the  commercial  class.  Rates  in  the  various  territories 
depend  upon  the  list  price  of  the  chassis  plus  the  list  price  of 
the  equipment;  thus,  a  truck  at  $1,650,  with  a  body  cab  and 
starter  costing  $735,  would  have  a  rate  of  $280  in  a  first-class 
territory.  The  same  truck,  with  'equipment  costing  $850, 
would  cost  $294.  This  is  the  rate  for  full  coverage.  For  $50 
deductible  the  cost  of  the  latter  is  $150  and  for  $100  deductible 
the  cost  is  $75.     Electric  cars  receive  a  10  per  cent  reduction. 

C.  Public  and  livery  vehicles. — Livery  vehicles  are  written 
at  150  per  cent  of  the  private  passenger  car  rate  and  other  than 
livery  vehicles  are  written  at  200  per  cent  of  the  private  passen- 
ger car  rate,  or  at  200  per  cent  of  the  commercial  car  rate  if 
of  the  bus  or  commercial  type. 

D.  Manufacturers'  and  dealers'  cars. — Individual  cars  are 
written  at  125  per  cent  of  the  private  passenger  car  rate  but 
a  blanket  policy  covering  all  the  cars  owned  by  a  manufacturer 
or  dealer  during  the  year  is  written  at  a  discount.  Thus,  for 
less  than  100  new  cars,  40  per  cent  of  the  private  passenger  or 
commercial  car  rates,  for  from  100  to  250  cars,  35  per  cent  of 
these  rates  and  for  250  cars  or  over,  30  per  cent  of  these  rates. 
On  used  cars  the  original  private  rates  apply  without  discount. 

Fire  insurance  policy.^ — A  fire  policy  is  designed  to  protect 
the  insured  against  damage  to  his  automobile  by  fire  or  trans- 
portation perils.  The  various  provisions  of  the  policy  are  so 
similar  to  the  provisions  of  a  policy  on  a  building  or  its  contents 
that  it  is  unnecessary  to  repeat  the  analysis  made  in  the  Fire 
Insurance  Section.  One  distinction  may,  however,  be  noted. 
Two  forms  of  policy  are  written,  the  non-valued  and  the  valued 
forms,  the  former  resembling  the  fire  insurance  policy  in  that 
the  total  value  of  the  property  is  left  to  be  determined  at  the 
time  of  the  loss,  while  the  latter  is  similar  to  a  marine  insurance 
policy,  in  that  the  total  value  of  the  property  is  agreed  upon  in 
advance.  The  significance  of  the  valued  form  of  policy  has 
been  fully  discussed  in  the  chapters  on  marine  insurance.  This 
policy  is  more  advantageous  to  the  insured,  other  things  being 
equal,  but  an  additional  rate  of  25  cents  per  $100  is  charged 

*See  Appendix  CVI. 


AUTOMOBILE  INSURANCE  307 

for  It.  While  the  amount  of  insurance  is  left  to  the-  judgment 
of  the  underwriters  it  Is  recommended  that  some  limitation  be 
placed  upon  the  amount  of  insurance  upon  low  priced  and  older 
cars.    The  policy  also  covers  the  hazard  of  transportation. 

Fire  insurance  rates.^ — We  will  consider  separately  the  vari- 
ous classes  of  cars,  I.e.,  private  passenger  cars,  livery  and  rent- 
ing automobiles,  commercial  vehicles  and  dealers'  automobiles. 

A.  Private  passenger  cars. — The  factors  Involved  In  the  fix- 
ing of  a  rate  are  the  construction  of  the  car,  the  existence  of 
protective  devices,  and  any  contingencies  covered  other  than  fire 
and  transportation  perils.  These  factors  are  discussed  In  the 
order  given : 

1.  Construction. — Allowance  Is  made  for  the  construction 
of  the  car  by  a  system  of  schedule  rating^  very  similar  to  the 
system  described  for  fire  insurance  on  other  forms  of  property. 
The  various  kinds  of  cars  of  different  makes  have  been  tested 
at  the  laboratories  of  the  underwriters  and  a  schedule  applied  to 
them  which  fixes  "points  of  credit"  for  all  good  features  found 
In  the  cars,  that  is,  features  which  tend  to  diminish  the  fire 
hazard.  This  schedule  allows  a  maximum  of  8,000  points 
credit  for  a  perfect  car  and  these  8,000  points  are  apportioned 
among  the  following  sub-divisions  of  hazard: 

Points 

1.  Storage  of  fuel   1,200 

2.  Fuel   feed 1,200 

3.  Fuel   line   and  fittings 400 

4.  Carburetion     400 

5.  Electrical  equipment 3,200 

6.  Exhaust  system 600 

7.  General  workmanship 1,000 

Each  of  these  main  groups  Is  then  sub-divided  Into  Its  essential 
elements.  Taking  the  first  group  (storage  of  fuel)  as  an  illus- 
tration, we  find,  that  120  points  are  allowed  for  tank  capacity, 
600  points  for  the  location  of  the  tank,  240  points  for  the  con- 
struction of  the  tank,  and  200  points  for  the  mounting  of  the 
,tank.  To  Illustrate  the  manner  In  which  this  schedule  Is  applied, 
70  points  credit  Is  allowed  for  a  capacity  of  between  10  and  20 
gallons,  ZS  points  credit  for  a  capacity  of  from  20  to  25  gal- 
lons, 15  points  credit  for  a  capacity  of  from  25  to  30  gallons, 
and  no  credit  for  a  tank  containing  more  than  30  gallons.     A 

"See  Appendices  CIX  and  CXL 
°  See  Appendix  CIX. 


308    INSURANCE  PRINCIPLES  AND  PRACTICES 

tank  located  at  the  rear  of  the  frame  and  not  enclosed  in  the 
body  Is  allowed  450  points  credit,  whereas  for  a  tank  located 
in  the  cowl  and  filled  from  under  the  hood,  no  credit  is  allowed. 
For  a  gravity  feed  system,  no  credit  Is  given,  for  a  pressure  feed 
system  120  points  credit,  and  for  a  vacuum  feed  system  with 
the  vacuum  tank  on  the  side  of  the  engine  block  opposite  the 
carburetor  and  remote  from  any  sparking  device  and  from  ex- 
haust piping,  as  high  as  755  points  is  allowed.  These  Illustra- 
tions are  sufficient  to  show  the  manner  In  which  credit  Is  allowed 
to  the  various  makes  of  cars  according  to  their  fire  hazard  as 
measured  by  this  schedule 

The  result  shows  that  the  poorest  car  received  a  credit  of 
about  400  points  and  the*  best  car  approximately  5,200  points, 
and  the  Interval  of  4,800  points  is  then  divided  into  8  classes 
and  to  each  class  a  rate  per  $100  of  Insurance  Is  given,  as  in 
the  schedule  below : 

Class  Points  Credit  Rate 

A   4,600  to  5,200  $0.40 

B    4,000  to  4,600  .45 

C   3,400  to  4,000  .55 

D   ' 2,800  to  3,400  .65 

E   2,200  to  2,800  .75 

F   1,600  to  2,200  1.00 

G 1,000  to  1,600  1.25 

H 400  to  1,000  1.50 

The  name  and  description  of  every  type  of  automobile  Is 
given  in  a  manual  with  a  symbol  In  the  form  of  a  letter  oppo- 
site each  car  to  designate  the  class  in  which  It  falls.  Thus,  a 
car  which  received  a  credit  of  2,900  points  would  fall  in  class 
D  and  would  be  marked  with  this  letter  in  the  manual,  and 
would  have  a  rate  of  65  cents. 

2.  Protective  devices. — Thus  far  the  only  protective  device 
recognized  is  a  fire  extinguisher  of  approved  type,  approved  by 
the  Underwriters  Laboratories,  for  which  a  reduction  of  15  per 

cent  is  allowed. 

3.  Other  contingencies  covered. — An  extra  premium  of  10 
cents  will  secure  protection  against  damage  by  earthquake,  ex- 
plosion or  accidental  leakage  of  water. 

The  above  rates  are  for  New  England  and  Eastern  territory. 
Other  rates  which  follow  the  same  system  apply  in  Southern 
territory  but  rates  in  other  portions  of  the  United  States  are 
on  a  different  basis. 


AUTOMOBILE  INSURANCE  309 

The  electric  cars  are  written  at  rates  below  the  average  of 
those  of  gasoline  cars.  On  new  cars  the  rates  for  fire  and  trans- 
portation coverage  range  from  40  cents  to  $1.50  for  the  classes 
from  A  to  H,  while  a  new  electric  would  cost  75  cents. 

For  a  valued  policy,  25  cents  extra  is  to  be  added.  It  should 
be  stated  that  the  valued  form  will  only  be  issued  for  a  com- 
bined fire  and  theft  policy,  and  that  no  reductions  are  allowed 
from  the  rate  so  found. 

These  rates  apply  for  a  term  of  insurance  of  one  year,  and 
coverage  for  a  similar  period  is  charged  a  relatively  higher  rate. 
Thus,  for  six  months  70  per  cent  of  the  annual  rate  is  charged. 

It  is  recommended  that  insurance  upon  the  cheaper  and 
older  cars  be  limited.  Thus,  it  is  advised  that  on  cars  costing 
$1,799  or  less,  and  purchased  new  more  than  42  months  prior 
to  the  insurance,  the  insurance  be  limited  to  40  per  cent  of  the 
list  price. 

B.  Livery  and  renting  automobiles. — These  are  divided  into 
two  classes :  Class  A,  including  sight-seeing  automobiles,  busses, 
taxicabs,  and  all  automobiles  of  the  private  passenger  type  used 
entirely  or  occasionally  for  carrying  passengers  for  hire,  and 
Class  B,  including  hotel,  club,  and  school  busses.  Class  A  is 
rated  by  adding  to  the  ordinary  private  type  rate  an  additional 
1  per  cent;  a  clause  is  attached  to  the  policy  reducing  the  amount 
of  insurance  at  the  rate  of  2^  per  cent  per  month.  Class  B  is 
written  without  additional  charge. 

C.  Commercial  vehicles. — These  are  rated  in  the  same  man- 
ner as  private  passenger  cars  and  assigned  letters  ranging  from 
A  to  I,  inclusive.  The  rates  for  a  new  car  range  from  75  cents 
to  $2.35.  Electric  commercial  vehicles  are  treated  the  same  as 
electric  private  passenger  cars.  Special  rates  are  granted  on 
fleets  of  automobiles  of  commercial  or  livery  type,  embracing 
10  or  more  cars,  or  a  lesser  number  if  the  original  cost  amounts 
to  $15,000. 

D.  Dealers'  automobiles. — On  this  type  of  car  no  valued 
policy  is  issued.  Five  forms  of  policies  are  issued;  Form  A  cov- 
ering every  automobile  owned  and  for  sale;  Form  A  to  cover 
automobiles  specifically  accepted  by  a  company;  Form  D,  a 
blanket  form  policy  covering  cars  in  more  than  one  location; 
Form  E,  a  $300  minimum  and  initial  premium  policy  for  whose 
rates  special  application  must  be  made,  and  finally  separate  pol- 
icies on  each  automobile.  On  the  first  three  types  of  policies, 
the  cars  are  written  at  the  rate  which  is  fixed  for  fire  insurance 


310    INSURANCE  PRINCIPLES  AND  PRACTICES 

on  the  contents  of  the  building,  with  a  minimum  rate  of  $1  for 
non-fireproof  buildings  and  50  cents  for  fireproof  buildings; 
Form  E  requires  special  application  to  the  company,  and  the  last 
named  is  written  only  at  dealers'  rates.  Rates  for  policies  cov- 
ering a  manufacturer's  output  away  from  the  factory  premises 
may  be  had  upon  application. 

Theft  insurance. — This  type  of  policy,  written  by  an  endorse- 
ment on  the  fire  insurance  form,  is  designed  to  cover  the  loss 
of  property  by  theft.  The  territories  are  similar  to  those  de- 
scribed for  fire  insurance  and  the  rate  varies  with  the  list  price 
of  the  car,  very  high  rates  being  charged  for  cheaper  cars  by 
reason  of  their  greater  susceptibihty  to  theft  and  disposal.  Cars 
are  divided  into  groups  on  the  basis  of  list  price,  lettered 
from  L  to  W.  Thus,  on  a  Plerce-Arrow  costing  over  $9,000 
the  rate  In  eastern  territory  Is  25  cents,  whereas  on  a  Class  W 
car  the  rate  is  $6.85.  Where  there  Is  endorsed  on  the  policy 
a  clause  whereby  the  Insured  agrees  that  the  automobile  will  be 
continuously  equipped  with  an  automobile  locking  device,  an 
allowance  of  15  per  cent  is  granted  from  the  theft  rate,  and 
where  a  clause  is  provided  for  the  maintenance  of  a  device  of 
locking  spare  tires  of  an  approved  type  an  allowance  of  5  per 
cent  is  granted  from  the  theft  rate.  By  reason  of  the  unfortu- 
nate experience  in  some  cities  a  penalty  schedule,  almost  doubling 
the  ordinary  rates,  has  been  applied.  In  one  large  eastern  city 
this  was  recently  removed  following  a  reorganization  of  the 
police  department. 


Chapter  XXI 

TITLE  INSURANCE 

Land  titles. — The  value  of  real  estate  is  dependent  upon  the 
security  of  the  owner's  title.  To  safeguard  and  secure  titles  the 
law  prescribes  certain  formalities  in  all  transactions  affecting  the 
ownership  of  real  estate  and  also  provides  a  recording  system. 
The  formalities  thus  necessitated  are  so  detailed  and  so  technical 
that  in  addition  to  falsely  recorded  statements,  unintentional 
errors  are  inevitable,  with  the  result  that  the  title  becomes 
defective.  Experience  has  shown  that  these  defects  have  fre- 
quently resulted  in  serious  financial  loss  and  everyone  who  buys 
land  or  lends  money  on  the  security  of  land  should  ascertain 
that  the  title  to  the  property  in  which  he  has  an  Interest  is 
marketable  and  free  from  incumbrances. 

The  lawyer's  abstract  and  its  defects. — The  old  method  of 
obtaining  the  desired  information  concerning  the  title  was  to 
have  a  lav/yer  examine  the  records  and  either  furnish  an  ab- 
stract or  give  an  opinion.  In  urban  districts  this  method  has 
been  supplanted  by  the  guarantees  of  title  companies  but  it  is 
still  extensively  used  in  rural  communities.  The  defects  of  a  plan 
of  this  kind  become  apparent  when  we  consider  the  exact  sig- 
nificance of  the  lawyer's  opinion.  The  examination,  in  order  to 
be  complete,  must  be  a  history  of  the  land  from  the  original 
grant  by  the  State  to  the  time  of  the  abstract,  as  shown  by  the 
records.  These  records,  in  most  counties,  run  for  well  over  a 
century,  involve  a  thousand  or  more  books  containing  copies 
of  deeds,  mortgages,  etc.,  thousands  of  law  suits,  records  of 
wills,  administration,  partition,  and  incumbrances  of  various 
kinds,  including  tax  records.  In  the  examination  of  these  doc- 
uments, even  though  the  lawyer  is  diligent  In  his  search  and 
competent  to  pass  upon  the  legal  complications  that  appear,  the 
method  is  Imperfect  and  open  to  objection  because  (1)  a  deed 
regular  on  its  face  may  be  a  forgery,  (2)  the  marital  state  of 
the  grantor  may  be  falsely  recorded,  (3 )  the  heirs  of  a  deceased 
owner  may  be  erroneously  entered  and  (4)  there  may  be  nu- 
merous other  false  statements  or  errors  Impossible  to  detect. 

311 


312    INSURANCE  PRINCIPLES  AND  PRACTICES 

If  the  lawyer  is  not  guilty  of  negligence  or  of  a  dishonest 
opinion  he  cannot  be  held  liable  even  if  it  is  later  found  that 
the  property  has  a  bad  title.  Assuming,  however,  that  he  is 
guilty  of  negligence,  the  probability  of  the  client  being  indem- 
nified for  his  loss  is  very  remote,  because  the  lawyer  who  renders 
such  an  opinion  usually  has  limited  financial  means.  The  dif- 
ficulties of  this  method  have  multiplied  rapidly  in  recent  years, 
particularly  in  connection  with  urban  real  estate,  where  trans- 
fers are  numerous  and  consequently  the  chance  for  error  and 
fraud  is  much  greater.  As  a  result  there  has  developed  an  insti- 
tution larger  and  more  capable  of  handling  such  a  proposition, 
which  is  known  as  a  Title  Insurance  Company. 

Guarantee  of  title  by;  an  insurance  company. — Title  insur- 
ance companies  are  usually  large  corporations- with  considerable 
financial  resources  and  equipped  with  adequate  facilities  for 
searching  titles.  Therefore,  a  land  owner  with  his  title  insured 
by  one  of  these  companies  has  nothing  to  fear  in  case  of  dispute 
because  he  know^s  that  the  guarantor  has  adequate  resources 
from  which  to  indemnify  him. 

The  operations  of  a  title  company. — Most  of  the  title  insur- 
ance companies  are  local  in  their  scope  and  insure  titles  only 
within  limited  territory,  due  to  the  enormous  cost  of  building 
up  what  is  called  an  "abstract  plant."  This  is  the  most  impor- 
tant asset  of  the  business  and  consists  of  classified  indexes  of 
facts  which  make  up  the  history  of  every  tract  of  land  in  the 
area  which  the  company  covers  and  is  known  as  the  "tract"  sys- 
tem. All  conveyances  are  recorded  and  kept  up  to  date,  and 
by  means  of  maps  and  locality  indexes  it  can  be  quickly  ascer- 
tained what  conditions  affect  any  given  plot  of  ground.  When 
an  application  for  insurance  is  received  these  records  are  inves- 
tigated and  if  the  title  is  found  defective  the  application  is  re- 
jected or  the  defects  are  enumerated  in  the  policy  and  excluded 
from  coverage. 

Extent  of  the  guarantee. — The  guarantee  given  by  the  policy 
relates  almost  entirely  to  the  past  and  in  this  respect  differs 
from  all  other  insurance,  which  deals  with  the  future.  The 
losses  that  are  insured  against  in  a  title  policy  must  be  caused 
by  an  undisclosed  defect  in  the  title  which  existed  at  the  time 
of  the  issuance  of  the  policy.  Upon  first  thought  this  would 
appear  to  be  a  great  disadvantage;  but  it  must  be  remembered 
that  defects  occurring  after  this  time  are  made  possible  by  the 


TITLE  INSURANCE  313 

wilful  act  or  negligence  of  the  insured,  for  which  he  should  not 
be  compensated. 

Extent  of  the  title  business. — The  insuring  of  land  titles  is 
a  business  which  is  comparatively  young,  having  originated  about 
forty  years  ago  and  grown  until  at  the  present  time  there  is 
scarcely  any  well-populated  district  in  the  United  States  which 
does  not  possess  a  title  insurance  company.  In  fact,  in  some  of 
the  urban  districts  there  are  many  such  companies  covering  the 
same  territory,  with  an  enormous  economic  waste  because  of  the 
duplication  of  expensive  "abstract  plants." 

As  previously  mentioned,  the  usual  scope  of  a  title  insurance 
company's  business  is  local;  but  during  the  last  few  years  sev- 
eral companies  have  attempted  to  extend  the  territory  which 
they  cover  so  as  to  Include  practically  the  entire  country.  It  is 
impossible  for  one  company  to  maintain  an  abstract  plant  for 
a  territory  so  large  and  therefore  the  tract  system  is  not  used. 
When  a  company  receives  an  application  for  Insurance  outside 
of  its  regular  territory  It  relies  on  the  Information  obtained 
from  local  title  examiners  or  examining  organizations  located  in 
the  district  in  question. 

The  principal  advantages  of  this  plan  of  "national"  title 
Insurance  accrue  to  persons  and  Institutions  Investing  In  real 
estate  in  different  parts  of  the  country.  For  example,  many  life 
Insurance  companies  invest  their  funds  in  real  estate,  particu- 
larly farm  loans,  and  they  are  finding  this  method  of  title  guar- 
antee a  very  excellent  way  to  protect  their  Investments. 

Types  of  Policies 

The  business  of  title  insurance  has  not  yet  been  completely 
standardized,  and  various  forms  of  contracts  exist.  There  are, 
however,  two  principal  types  of  policies,  one  covering  the 
owner's  risk  and  the  other  the  mortgagee's  risk,  although  many 
special  policies  covering  certain  phases  of  either  kind  of  risk 
are  written. 

1.  Owner's  risk. — An  analysis  of  a  typical  policy  of  this 
kind  Is  given  below : 

A.    The  insuring  clause. — The  usual  policy  protecting  the 
title  of  the  owner  of  property  promises  indemnity 

"for  loss  not  exceeding  $ which  the  insured  sustains  (1)  by  reason 

of  any  defect  of  the  title  of  the  insured  to  the  estate  or  interest  described  in 
Schedule  A  hereto  annexed,  affecting  the  premises  described  in  said  schedule,  or 
(2)  by  reason  of  the  unmarketability  of  the  title  of  the  insured  described  in  said 


314    INSURANCE  PRINCIPLES  AND  PRACTICES 

schedule  to  or  in  said  premises,  or  (3)  because  of  liens  or  incumbrances  against 
the  same  at  the  date  of  this  Policy;  excepting  the  defects,  estates,  objections, 
liens  or  incumbrances  mentioned  in  Schedule  B,  or  excepted  by  the  conditions  of 
this  Policy,  hereto  annexed,  and  hereby  incorporated  into  this  contract,  the  loss 
and  the  amount  to  be  ascertained  in  the  manner  provided  in  the  annexed  con- 
ditions, and  to  be  payable  upon  compliance  by  the  insured  with  the  stipulations 
of  said  conditions,  and  not  otherwise." 

The  "Schedule  A"  referred  to  sets  forth, 

"(1)  The  estate  or  interest  of  the  insured  covered  by  this  Policy.  (2)  Descrip- 
tion of  the  property  the  title  to  which  is  insured.  (3)  The  deed  or  other  means 
by  which  title  or  interest  is  vested  in  the  insured." 

"Schedule  B"  Is  a  statement  showing 

"estates.  Interests,  defects  or  objections  to  title,  and  Hens,  charges  and  incum- 
brances affecting  said  premises  or  the  estate  or  interest  insured,  which  do  or 
may  now  exist,  and  against  which  the  Company  does  not  insure  or  agree  to 
indemnify." 

If  the  abstract  shows  defects  in  the  title,  they  insert  them  at 
this  point. 

B.  The  policy  conditions. — The  policy  conditions  contain 
limitations,  stipulations,  definitions,  promises,  and  explanations 
which  may  be  grouped  as  follows : 

(  1 ) .  Defend  insured  against  suit. — The  policy  promises  to 
defend  the  insured  in  all  actions  or  proceedings  founded  on  a 
claim  of  title  or  incumbrance  prior  in  date  to  the  policy. 

(2) .  Conditions  under  which  loss  must  arise. — The  specific 
conditions  under  which  loss  may  arise  are  enumerated  in  the 
policy,  which  provides  that  no  claim  shall  arise  under  the  policy 
except    in    the    case    just    mentioned  in    regard    to    suit    and 

"In  the  following  cases:  (I)  Where  there  has  been  a  final  judgment  rendered 
in  a  court  of  competent  jurisdiction,  under  which  the  insured  may  be  dispossessed 
or  evicted  from  the  premises  covered  by  this  Policy,  or  from  some  part  or  un- 
divided share  of  interest  therein.  (II)  Where  there  has  been  a  final  determina- 
tion adverse  to  the  title,  as  insured,  in  such  a  court,  upon  a  lien  or  incumbrance 
not  excepted  in  this  Policy.  (Ill)  Where  the  insured  shall  have  contracted,  in 
good  faith,  in  writing,  to  sell  the  insured  estate  or  interest,  and  the  title  has  been 
rejected  because  of  some  defect  or  incumbrance  not  excepted  in  this  Policy,  and 
notice  in  writing  of  such  rejection  shall  have  been  given  to  the  Company  within 
ten  days  thereafter.  The  Company  shall  in  that  case  have  the  option  of  paying 
the  loss,  of  which  the  insured  must  present  proper  proof,  or  of  commencing  or 
defending  within  30  days  after  receiving  such  notice,  either  in  its  own  name  or 
at  its  option  in  the  name  of  the  insured,  some  proper  action  or  proceeding,  begun 
or  to  be  begun  in  a  court  of  competent  jurisdiction,  for  the  purpose  of  deter- 
mining the  validity  of  the  objection  alleged  by  the  vendee  to  the  title,  and  only  in 
case  a  final  determination  is  made  in  such  action  or  proceeding,  sustaining  the 
objection  to  the  title,  shall  the  Company  be  liable  on  this  Policy.  (IV)  Where 
in  cases  of  insurance  on  the  interest  of  a  mortgagee,  the  mortgage  has  been 
adjudged,  by  a  final  determination  in  a  court  of  competent  jurisdiction,  to  be  a 


TITLE  INSURANCE  •       315 

lien  inferior  to  that  designated  in  this  Policy;  or  where  on  foreclosure  of  the 
mortgage,  the  purchaser  under  the  judgment  in  tlie  action  has  been  relieved  by 
the  court  from  his  purchase  by  reason  of  the  existence  of  some  defect  in  the  title 
or  from  some  incumbrance  thereon  not  excepted  in  this  Policy.  (V)  Where  the 
insured  shall  have  negotiated  a  loan  on  the  security  of  a  mortgage  on  the  in- 
sured estate  or  interest,  and  the  title  shall  have  been  rejected  by  the  proposed 
lender,  the  Company,  if  there  is  no  dispute  as  to  the  facts,  will  consent  to  the 
submission  of  the  question  of  a  validity  of  the  title  as  insured  to  the  Appellate 
Division  of  the  Supreme  Court  in  the  Department  in  which  is  situated  the  prop- 
erty affected  by  this  Policy,  and  upon  the  judgment  of  that  court  in  such  action 
shall  depend  the  liability  of  the  Company.  (VI)  Where  the  insured  shall  have 
transferred  the  title  insured  by  an  instrument  containing  covenants  in  regard  to 
title  or  warranty  thereof  and  there  has  been  a  final  judgment  rendered  in  a 
court  of  competent  jurisdiction  against  the  assured,  his  executors  or  adminis- 
trators, on  any  of  such  covenants  or  warranty  and  because  of  some  defect  of 
title  or  incumbrance  against  which  the  holder  of  this  Policy  is  hereby  insured." 

(3).  Effect  of  misstatement. — If  any  untrue  statement  af- 
fecting the  Insurance  was  made  by  the  Insured  or  his  agent,  or  if 
there  was  any  suppression  of  a  material  fact,  the  policy  Is  void. 

(4).  Assignment  of  policy. — No  transfer  of  the  policy  is 
permitted. 

"Except  that  a  policy  held  by  the  owner  of  a  mortgage  or  other  incumbrance  may 
be  transferred  to  an  assignee  of  the  interest  insured,  or  to  the  purchaser  at  a  sale 
under  foreclosure  where  the  property  sold  is  bought  by  or  for  the  insured,  and 
except  also  in  such  other  cases  as  the  Company  may,  by  special  agreement, 
permit." 

Even  in  these  cases,  the  transfer  must  have  the  approval  of  the 
company  before  it  is  vafid. 

(5).  Reduction  of  premium  on  new  policy: 

"Whenever  the  holder  of  a  policy  on  his  title  as  owner  in  fee  or  of  a  leasehold 
shall,  within  seven  years  from  the  date  of  the  Policy,  sell  or  mortgage  any  or 
all  of  the  real  estate  therein  described,  and  shall  within  thirty  days  thereafter 
apply  for  a  new  Policy  on  the  same  title,  to  be  issued  to  the  grantee  or  mortgagee, 
then,  if  the  risk  be  again  accepted  by  the  Company,  the  former  Policy  shall  be 
surrendered  and  canceled,  and  one-half  of  the  sum  paid  as  premium  therefor 
will  be  allowed  as  a  deduction  from  the  premium  on  the  new  Policy." 

(6).  Duties  of  insured  if  title  is  attacked: 

"In  case  any  action  or  proceeding  is  begun,  the  object  or  effect  of  which  shall 
or  may  be  to  impugn,  attack  or  call  in  question  the  validity  of  the  title  hereby 
insured,  as  insured,  or  to  raise  any  material  question  relating  to  a  claim  or 
incumbrance  hereby  insured  against,  or  to  cause  any  loss  or  damage  for  which 
the  Company  shall  or  may  be  liable  under  or  by  virtue  of  any  of  the  terms  or 
conditions  of  this  policy,  or  in  case  any  action  or  proceeding  is  begun  that 
may  have  such  object  or  effect,  it  shall  be  the  duty  of  the  insured  at  once  to 
notify  the  Company  of  such  fact,  in  writing.  In  such  cases  and  in  all 
cases  where  this  Policy  requires  the  Company  to  prosecute  or  defend,  it  shall 
be  the  duty  of  the  insured  to  secure  to  it  the  right  and  opportunity  to  main- 
tain  or   defend   the    action   or   proceeding,    and    all    appeals    from    any   deter- 


316    INSURANCE  PRINCIPLES  AND  PRACTICES 

mination  therein,  and  to  give  it  all  reasonable  aid  therein,  and  to  permit  it  to 
use,  at  its  option,  the  names  of  the  insured.  If  such  notice  shall  not  be  given  to 
the  Company  within  ten  days  after  the  service  of  the  first  summons  or  other 
process,  paper  or  pleading,  in  such  action  or  proceedings,  then  this  Policy  shall 
be  void.  Provided,  however,  that  an  assignee  for  value  of  the  Policy,  with  the 
consent  of  the  Company  thereon  endorsed,  shall  not  be  affected  by  any  such 
failure  to  notify,  if  such  assignee,  through  ignorance  of  the  fact  of  such  action 
or  proceeding  having  been  begun,  shall  have  been  unable  to  give  or  cause  to  be 
given  the  notice  required  by  these  conditions;  and  provided,  also,  that  no  failure 
to  give  such  notice  shall  affect  the  Company's  liability,  if  such  failure  has  not 
prejudiced  and  cannot  in  the  future  prejudice  the  Company.  The  Company  will 
pay,  in  addition  to  the  amount  of  the  loss,  all  costs  imposed  on  the  insured  in 
litigation  carried  on  by  it  for  the  insured  under  the  requirements  of  this  Policy, 
but  it  will  in  no  case  be  liable  for  the  fees  of  any  counsel  or  attorney  employed 
by  the  insured,  and  the  costs  and  loss  paid  shall  not  together  exceed  the 
amount  of  this  Policy." 

(7).  Adjustment  of  loss: 

"In  every  case  where  the  liability  of  the  Company  has  been  definitely  fixed 
in  accordance  with  these  conditions,  the  loss  or  damage  shall  be  payable  within 
thirty  days  thereafter.  Provided,  however,  that  in  every  case,  the  Company 
may  demand  a  valuation  of  the  insured  estate  or  interest,  to  be  made  by  three 
arbitrators,  or  any  two  of  them,  one  to  be  chosen  by  the  insured  and  one  by 
the  Company,  and  the  two  thus  chosen  selecting  an  umpire;  and  then  no  right 
of  action  shall  accrue  until  thirty  days  after  notice  of  such  valuation  shall  have 
been  served  upon  the  Company,  and  the  insured  shall  have  tendered  a  convey- 
ance or  transfer  of  the  insured  estate  or  interest  to  a  purchaser  to  be  named 
by  the  Company,  at  such  valuation,  less  the  amount  of  any  incumbrance  on  said 
insured  estate  or  interest  not  hereby  insured  against,  and  the  Company  shall 
have  failed  within  that  time,  said  tender  being  during  that  time  kept  good,  to 
find  a  purchaser  for  the  estate  or  interest  upon  such  terms.  And  provided,  also, 
that  this  Company  shall  always  have  the  right  to  appeal  from  any  adverse 
determination;  but  no  appeal  shall  operate  to  delay  the  payment  of  the  loss,  if 
the  insured  shall  give  to  the  Company  satisfactory  security  for  the  repayment 
to  the  Company  of  the  amount  of  such  loss  in  case  there  shall  be,  ultimately, 
a  determination  in  favor  of  the  Company.  And  provided,  further,  that  in  every 
case  the  Company  shall  have  the  option  of  settling  the  claim  or  paying  this 
Policy  in  full;  and  the  payment  or  tender  of  payment  to  the  full  amount  of 
this  Policy  shall  determine  all  liability  of  the  Company  under  it." 

It  is  also  provided  that  payments  under  the  policy  shall  reduce 
the  amount  of  insurance  by  such  amount. 

(8).  Subrogation: 

"Whenever  the  Company  shall  have  settled  a  claim  under  this  Policy,  it  shall 
be  entitled  to  all  the  rights  and  remedies  which  the  insured  would  have  had 
against  any  other  person  or  property  in  respect  to  such  claim,  had  this  Policy 
not  been  made,  and  the  insured  will  transfer  or  cause  to  be  transferred  to  the 
Company  such  rights,  and  permit  it  to  use  the  name  of  the  insured  for  the 
recovery  or  defense  thereof.  If  the  payment  does  not  cover  the  loss  of  the 
insured,  the  Company  shall  be  subrogated  to  such  rights,  in  the  proportion 
which  said  payment  bears  to  the  amount  of  said  loss  not  covered  by  said  pay- 
ment. And  the  insured  warrants  that  such  right  of  subrogation  shall  vest  in 
the  Company  unaffected  by  any  act  of  the  insured." 


TITLE  INSURANCE  317 

(9).  Items  not  covered: 

"Defects  and  incumbrances  arising  after  the  date  of  this  Policy  or  created  or 
suffered  by  the  insured,  and  assessments  not  confirmed  at  the  date  of  this 
Policy,  are  not  to  be  deemed  covered  by  it;  and  no  approval  of  any  transfer  of 
this  Policy  shall  be  deemed  to  make  it  cover  any  such  defect,  incumbrance  or 
assessment." 

2.  Mortgagee's  risk. — The  policy  protecting  the  mortgagee 
is  somewhat  different  from  that  issued  to  the  owner,  and  is 
more  than  pure  title  insurance  because  it  not  only  protects  him 
in  case  of  title  defects,  but  also  as  to  payment  of  the  principal 
and  interest  on  the  mortgage.  A  typical  contract  of  this  type 
guarantees  to  the  insured  "and  to  such  subsequent  owners  of  the 
bond  and  mortgage  described  in  Schedule  A,  as  shall  give  to  the 
Company  prompt  notice  and  proof  of  such  ownership"  : 

a.  Payment  of  the  Interest  on  the  said  bond  and  mortgage 

at  the  rate per  centum  per  annum,  from  when  the 

same  becomes  due  under  the  terms  thereof. 

b.  Payment  of  the  principal  of  the  said  bond  and  mortgage 
as  soon  as  collected,  and  in  any  event  within  twelve  months 
after  the  same  becomes  due  under  the  terms  thereof,  with 
regular  payment  meanwhile  of  the  interest  at  the  rate  hereby 
guaranteed. 

c.  To  continue  this  guarantee  on  any  extension  of  the  said 
mortgage  to  which  the  Company  shall  consent  in  writing. 

d.  That  the  said  mortgage  Is  a  valid  first  lien  upon  a  good 
and  marketable  title  in  fee  to  the  property  described  in 
Schedule  "A." 

e.  To  keep  the  mortgaged  premises  Insured  against  fire,  and 
to  enforce  prompt  payment  of  all  fire  insurance  premiums  and 
all  taxes,  assessments  and  water  rates  which  may  become  liens 
thereon. 

f .  To  conduct  without  expense  to  the  Insured  all  actions  or 
proceedings  that  it  may  deem  necessary  to  take  in  connection 
with  this  guarantee,  or  the  said  bond  or  mortgage,  and  any 
action  that  may  be  brought  against  the  insured  as  the  owner 
thereof.^ 

On  the  other  hand,  the  insured  agrees: 

a.  That  the  Company  is  the  agent  of  the  Insured  to  collect 

*The  "Schedule  A"  referred  to  is  a  description  of  the  real  property 
involved. 


318    INSURANCE  PRINCIPLES  AND  PRACTICES 

all  the  interest  and  principal  secured  by  said  bond  and  mortgage, 
and  to  exercise  and  enforce  any  right  or  option  secured  to  the 
Insured  thereby,  and  by  any  policy  of  fire  Insurance  upon  the 
premises  covered  by  said  mortgage,  and  to  bring  In  the  name  of 
the  insured  any  action  that  may  be  necessary  In  connection  there- 
with, and  to  receive  any  proceeds  thereof, 

b.  To  refrain  from  collecting  any  part  of  the  said  interest 
or  principal,  and  from  exercising  any  right  or  option  secured  by 
the  said  bond  or  mortgage,  or  by  any  policy  of  fire  Insurance  cov- 
ering the  mortgaged  premises,  and  from  doing  anything  which 
in  any  way  affects  the  validity,  or  the  security,  or  the  terms  of 
the  said  bond  and  mortgage. 

c.  To  permit  the  Company  to  retain  as  its  premium  for  this 
guarantee  all  Interest  collected  in  excess  of  the  rate  hereby  guar- 
anteed, and  to  have  possession  of  all  fire  insurance  policies  cov- 
ering the  mortgaged  premises. 

d.  To  produce  and  deposit  the  saidbond  and  mortgage  with 
the  Company  upon  its  request,  and  to  render  such  reasonable 
assistance  as  the  Company  may  require  in  any  proceedings  taken 
in  connection  therewith. 

e.  To  notify  the  Company  in  writing  promptly  of  any  action 
or  proceeding  affecting  saldl  bond  or  mortgage  and  to  forward 
to  the  Company  promptly  any  notice  relating  to  any  policy  of 
fire  Insurance  affecting  the  mortgaged  premises. 

f.  To  assign  said  bond  and  mortgage  to  the  Company  if  re- 
quested, upon  receipt  from  It  of  the  full  amount  due  the  in- 
sured, whenever  under  the  terms  thereof  payment  of  the  prin- 
cipal may  be  demanded. 

3.  Special  policies. — Many  times  neither  of  the  two  policies 
just  explained  will  meet  the  needs  of  persons  with  peculiar  in- 
terests in  property  and  special  policies  are  therefore  written. 
Common  illustrations  of  this  are  when  it  is  desirable  to  guar- 
antee a  certain  feature  of  a  will  relating  to  property  or  to  guar- 
antee that  certain  agreements  or  restrictions  concerning  specific 
plots  of  land  are  legal.  In  these  cases  the  extent  of  the  pecu- 
niary interest  of  the  insured  is  usually  much  more  difficult  to  as- 
certain than  in  the  ordinary  owners'  and  mortgagees'  policies. 
Consequently,  the  companies  are  very  careful  when  issuing  such 
contracts  and  charge  a  high  premium  because  of  the  great  risk. 


TITLE  INSURANCE  319 

The  Premium 

The  premium  varies  with  the  company  and  depends  largely 
on  local  conditions  and  the  Icind  of  policy.  The  rates  published 
by  a  company  doing  a  national  title  insurance  business  are  as 
follows : 

OWNERS'  POLICIES 

Per  Thousand 

Up  to  $25,000 $5.00 

Over     25,000  to  $50,000,  add 4.00 

Over     50,000  to  100,000,  add 3.00 

Over  100,000,   add 2.50 

These  fees  for  owners'  policies  are  based  on    the  actual    market  value  of 
property  insured. 

MORTGAGEES'  POLICIES 

Up  to  $50,000 $3.50 

Over       50,000,   add 2.50 

The  fees  for  mortgagees'  policies  are  based  on  the  amount 
of  the  loan. 

These  fees  are  for  insurance  only  and  the  cost  of  examina- 
tion and  other  items,  such  as  survey,  must  be  added  to  the  pre- 
mium. In  the  case  of  the  owners'  policy  one  single  payment  at 
the  beginning  of  the  policy  is  the  only  payment  ever  required  as 
long  as  there  is  no  change  in  the  title.  While  there  is  no  addi- 
tional insurance  premium  on  the  mortgagee's  policy  Its  equiva- 
lent is  accomplished  by  promising  to  pay  a  stipulated  rate  of  in- 
terest to  the  mortgagee,  while  the  mortgagor  pays  a  rate  some- 
what higher  to  the  insurance  company.  The  latter  payment 
usually  exceeds  the  former  by  about  ^  of  1  per  cent. 

Guaranteed  mortgages. — Along  with  the  regular  title  insur- 
ance business  there  has  developed  an  investment  guarantee  busi- 
ness of  such  magnitude  that  it  deserves  special  mention. 

The  title  insurance  companies  purchase  first  mortgages  on 
improved  real  estate  and  then  guarantee  and  issue  them  in  two 
different  forms : 

1.  Guaranteed  First  Mortgages. — From  a  list  of  mortgages 
purchased  by  the  insurance  company  a  customer  may  select  one, 
let  us  say,  for  $10,000.  When  he  pays  for  it  the  company 
assigns  to  him  the  mortgage  of  record,  giving  him  the  note,  the 
mortgage,  the  assignment  if  he  desires  the  same,  title  and  fire 
insurance  papers,  and  a  mortgage  insurance  policy  which  guar- 


320    INSURANCE  PRINCIPLES  AND  PRACTICES 

antees  a  fixed  net  rate  of  interest  and  the  return  of  the  princi- 
pal. 

2.  Guaranteed  First  Mortgage  Certificates. — The  mortgages 
are  assigned  under  a  trust  agreement  to  an  independent  trust 
company  and  guaranteed  as  to  principal  and  interest.  Certifi- 
cates against  these  mortgages  are  then  issued  in  multiples  of 
$100  and  sold  to  investors.  Nothing  could  be  much  safer,  as 
the  certificates  represent  an  assignment  of  an  interest  in  mort- 
gages that  are  reinforced  by: 

a.  Policies  of  mortgage  insurance. 

b.  Certificates  of  appraisal,  showing  that  the  value  of  the 
property  covered  is  at  least  50  per  cent  in  excess  of  the  mortgage. 

c.  Policies  of  fire  insurance. 

Advantages  of  title  insiirance. — From  the  foregoing  explan- 
ation it  can  be  seen  that  title  insurance  differs  from  other  con- 
tracts of  insurance  in  that  it  deals  more  with  the  possibilities  of 
the  past  than  with  the  future.  This,  however,  is  due  to  the  na- 
ture of  the  risk  and  does  not  deprive  the  insurance  of  certain  ad- 
vantages which  may  be  briefly  stated  as  follows: 

1.  It  protects  an  owner  against  loss  in  case  a  defect  appears 
in  the  title  to  his  property.  The  possibility  of  this  circumstance 
arising  can  be  appreciated  from  a  list  of  common  defects  that 
are  disclosed  at  inopportune  times  and  vitally  affect  the  title : 

a.  The  records  may  not  show  a  deed  or  mortgage,  which 
could  not  therefore  be  found  in  the  ordinary  examination,  but 
nevertheless  may  affect  the  title. 

b.  One  of  the  deeds  in  the  chain  of  title  may  be  a  forgery. 

c.  A  deed  may  have  been  made  under  a  power  of  attorney 
after  the  death  of  the  principal,  which  renders  it  void. 

d.  Another  may  have  been  made  by  an  insane  or  other- 
wise incompetent  person. 

e.  Another  may  have  been  made  by  a  person  of  the  same 
name  as  the  owner,  but  having  no  interest. 

f.  A  husband  may  not  have  united  in  the  conveyance  with 
his  wife,  in  which  case  her  deed  is  void. 

g.  A  wife  may  not  have  united  in  her  husband's  deed,  leav- 
ing her  dower  right  outstanding. 

h.  A  testator  may  have  had  a  child  born  after  the  date  of 
his  will,  who  might  claim  his  share,  notwithstanding  the  will. 

i,  A  will  may  have  been  revoked  by  the  marriage  of  the 
testator  after  its  date. 


TITLE  INSURANCE  321 

j.  A  conveyance  by  heirs  of  a  supposed  Intestate  may  be 
defeated  by  the  subsequent  discovery  of  a  will. 

k.  A  retrospective  assessment  for  taxes  or  reapportion- 
ment of  the  cost  of  local  improvements  might  be  made. 

1.  An  heir  or  other  person  supposed  to  be  dead  may  ap- 
pear and  recover  the  property. 

m.  A  judgment  upon  which  the  title  depends  may  be  void 
by  reason  of  some  matter  not  appearing,  e.g.,  service  of  process 
on  the  wrong  person,  failure  to  include  all  proper  parties,  want 
of  authority  of  attorney  to  represent  party,  etc. 

2.  It  defends  the  insured  in  case  of  a  lawsuit  involving  the 
title. 

3.  It  makes  property  marketable.  The  knowledge  that  an 
insurance  company  has  guaranteed  a  title  prevents  the  circula- 
tion of  harmful  rumors  concerning  the  title  to  property.  Thus, 
it  not  only  makes  the  property  easier  to  sell  but  also  increases 
the  possibility  of  obtaining  a  higher  price. 

4.  It  relieves  a  mortgagee  of  all  worry  concerning  the  col- 
lection of  his  principal  and  interest.  Not  only  is  he  protected 
against  loss  because  of  thef  unmarketability  of  the  title,  but  the 
payment  of  principal  and  interest  are  guaranteed. 

5.  It  provides  a  safe  and  profitable  investment  In  the  form 
of  guaranteed  mortgages  and  mortgage  certificates. 


Chapter  XXII 

CREDIT  INSURANCE 

Business  failures. — All  well-managed  business  houses  can  de- 
termine in  advance  and  with  some  degree  of  accuracy  each  item 
in  their  overhead  expense  except  one — the  credit  loss  due  to  bad 
accounts.  Not  knowing  what  this  loss  may  be,  yet  wishing  to 
make  some  preparation  in  advance,  many  concerns  maintain  a 
reserve  for  "bad  debts"  or  "doubtful  accounts."  The  amount 
set  aside  for  this  purpose  is  guessed  at  in  various  ways,  usually 
being  the  amount  ascertained  by  experience  to  be  the  average 
annual  loss.  This  is  a  very  satisfactory  method  in  a  normal  or 
average  year,  but  just  when  least  expected  these  losses  fre- 
quently far  exceed  the  amount  for  which  provision  was  made. 
Thus,  the  loss  of  one  large  account  may  wipe  out  the  profit  on 
a  hundred  others,  and  if  the  loss  is  very  heavy  it  may  result 
in  financial  embarrassment  or  even  ruin. 

These  losses  are  the  result  of  the  method  of  doing  business 
on  credit,  less  than  5  per  cent  of  our  commercial  transactions 
being  made  for  cash.  As  long  as  we  continue  our  present  sys- 
tem and  men  remain  human  and  fallible  we  can  expect  such 
losses,  for  it  has  been  found  by  experience  that  there  are  at 
least  as  many  business  failures  as  successes.  The  causes  for 
these  failures  are  rather  numerous  and  have  been  the  subject 
of  much  investigation  by  the  mercantile  agencies.  Bradstreet's 
have  compiled  failure  statistics  for  many  years  with  the  follow- 
ing results  as  to  the  causes  and  their  distribution. 

Per  Cent 

Incompetence   38.2 

Inexperience     5.6 

Lack  of  Capital 30.3 

Unwise  Credits  1.3 

Fraud   7.0 

■  Failure  of  Others 1.7 

Extravagance     1.1 

Neglect   1.7 

Competition    1.1 

Specific  Conditions    11.3 

Speculation    .7 

100.0 

Unfortunately,  these  figures  do  not  alone  tell  the  tale.  If 
they  did  possibly  some  specific  remedies  could  change  them. 

322 


CREDIT  INSURANCE  323 

The  conditions  which  bring  these  causes  to  light  are  usually  more 
fundamental  than  the  names  given  would  indicate,  and  the  fact- 
ors underlying  the  axiom  "when  prices  rise  failures  decrease; 
when  prices  fall  failures  increase"  possibly  go  far  to  explain  the 
primary  cause  of  many  failures.  The  solution  would  then  seem 
to  be  price  stabilization,  a  thing  which  now  appears  impossible 
and  perhaps  will  always  be  so,  because  of  our  peculiar  trade  con- 
ditions. 

The  conditions  referred  to  are  the  periodic  "trade  convul- 
sions" which  occur  in  this  country.  Other  countries  have  their 
peaks  and  valleys  in  business  conditions  but  nowhere  else  are 
they  so  violent  or  so  frequent  as  in  the  United  States.  Specula- 
tion and  over-extension  of  credit  are  usually  blamed  for  these 
upheavals,  the  speculation  really  resulting  from  the  over-exten- 
sion of  credit.  The  actual  process  by  which  this  takes  place  may 
be  traced  somewhat  as  follows :  Starting  at  the  point  where 
money  becomes  plentiful  and  the  banks  are  willing  to  loan  at 
a  low  rate  of  interest,  we  find  that  prices  in  some  quarters  be- 
gin to  rise.  This  stimulates  confidence.  Business  men  begin 
to  extend  more  credit  to  customers  and  these  customers  in  turn 
extend  more  credit  to  their  customers  and  so  on  ad  infinitum. 
This  means  that  credit  is  accumulating  like  an  inverted  pyra- 
mid, all  depending  on  the  money  and  the  attitude  of  the  bankers 
at  the  base.  If  the  credit  extended  is  confined  to  certain  limits 
the  base  can  support  the  pyramid,  but  that  is  not  the  way  the 
American  people  do  things.  The  rise  in  prices  sets  the  wheels 
of  industry  turning  and  suddenly  everybody  becomes  optimistic 
beyond  belief;  then  credit  is  extended  beyond  the  line  of  safety, 
trade  is  expanded  beyond  need,  prices  are  increased  beyond  rea- 
son, speculation  is  rampant,  money  is  spent  foolishly  and  ex- 
travagantly, and  just  when  we  conclude  that  a  "Utopia"  has 
been  achieved  the  rubber  band  of  credit  snaps  and  we  plunge 
headlong  into  a  period  of  depression  and  pessimism. 

What  causes  this  sudden  change?  Somewhere  along  the  line 
the  ability  of  some  debtors  to  pay  was  doubted.  This  has  re- 
sulted in  the  curtailing  of  credit  and  in  the  withdrawal  of  one 
of  the  supporting  blocks  at  the  base  of  the  pyramid.  All  busi- 
ness being  interdependent  the  pestilence  spreads  rapidly.  Con- 
traction begets  contraction  and  this  results  in  falling  prices  and 
increasing  failures.  Accounts  that  were  thought  to  be  the  best 
are  found  worthless.  Everybody  doubts  everybody  else,  and 
industry  as  a  whole  slows  down  to  the  detriment  of  all. 


324    INSURANCE  PRINCIPLES  AND  PRACTICES 

Surely  some  method  should  be  devised  whereby  this  evil 
could  be  eliminated.  Credit  insurance  has  been  one  of  the 
suggested  means  to  accomplish  this.  Credit  insurance  cannot 
eliminate  failures  nor  can  it  prevent  trade  cycles,  but  it  can  at 
least  mitigate  the  usual  disastrous  consequences  of  sudden  price 
changes  by  giving  merchants  confidence  in  their  book  ac- 
counts. Furthermore,  it  does  not  and  should  not  foster  con- 
cerns with  inherent  defects;  but  it  can  reduce  a  large  part  of 
the  loss  due  merely  to  lack  of  confidence,  which  reaches  many 
millions  each  year.  In  fact,  the  total  credit  loss  over  a  period 
of  years  averages  greater  than  the  fire  losses,  although  a 
large  portion  of  this  is  "normal"  loss  and  not  regarded  as 
within  the  scope  of  credit  insurance.  Nevertheless,  any  sys- 
tem which  can  in  any  way  decrease  failures  is  an  economic 
benefit  to  the  country  and  deserves  encouragement.  In  order 
better  to  understand  the  plan  and  functions  of  credit  insurance 
we  will  proceed  with  an  explanation  of  the  existing  scheme. 

General  plan  of  credit  insurance. — Credit  insurance  provides 
a  contract  of  indemnity  promising  to  reimburse  a  wholesaler, 
manufacturer  or  jobber  for  the  unusual  losses  incurred  by  him 
through  the  failure  of  his  customers  to  meet  their  obligations. 

This  is  not  its  sole  purpose,  because  it  is  intended  that  it  shall 
promote  prudent  selling  either  ( 1 )  by  insuring  only  those  ac- 
counts that  have  a  good  credit  rating  for  a  limited  amount  on  in- 
dividual debtors  or  (2)  by  charging  a  higher  premium  for  in- 
ferior ratings  and  large  amounts  on  individual  debtors.  An- 
other purpose  is  to  furnish  a  collection  service  for  its  policy- 
holders. This  is  conducted  for  the  protection  of  the  insured  as 
well  as  the  insurance  company,  and  has  proven  a  valuable  means 
of  minimizing  losses. 

Types  of  policies. — Two  principal  types  of  policies  are  be- 
ing written,  one  known  as  the  "Limited"  and  the  other  the 
"Unlimited." 

1.  The  "Limited"  policy  is  one  having  a  face  value  which  is 
the  maximum  total  liability  of  the  insurer.  Thus,  if  the  policy 
has  a  face  of  $25,000  and  the  insured  sustains  losses  aggregat- 
ing $50,000  he  is  only  partially  insured  even  though  all  the 
lost  accounts  were  within  conservative  credit  limits. 

2.  The  "Unlimited"^  policy  makes  no  provision  for  a  maxi- 
mum total  liability  and  has  no  face  value.  As  long  as  the  indi- 
vidual losses  come  within  the  amounts  specified  in  the  "Table 

>  See  Appendix  CXIII  or  CXIV. 


CREDIT  INSURANCE  325 

of  Ratings,"  contained  in  the  policy  they  will  be  paid  regard- 
less of  the  total  amount. 

Both  types  arc  written  with  many  variations,  of  which  the 
more  important  will  be  explained. 

a.  It  is  now  customary  to  provide  for  coinsurance  on  all 
losses,  the  usual  amount  being  10  per  cent,  but  this  is  higher 
on  inferior  ratings. 

b.  Some  policies  provide  that  an  account,  in  order  to  be 
covered,  must  be  placed  In  the  hands  of  the  Insurance  com- 
pany for  collection  within  a  specified  time  after  It  is  past  due. 
Others  make  such  action  elective  with  the  insured,  and  when 
this  is  the  case  the  policy  Is  termed  "optional." 

c.  An  additional  premium  is  sometimes  necessary  and  Is  ad- 
justed according  to  the  volume  of  sales  when  they  are  ascer- 
tained. Where  such  additional  premiums  can  be  collected  the 
policy  Is  called  "assessable." 

The  effect  of  these  different  provisions  will  be  better  under- 
stood from  the  policy  analysis  which  follows,  explaining  the  two 
most  important  "unlimited"  policies,  either  one  or  the  other  of 
these  containing  the  provisions  referred  to. 

The  policy  analysis. — The  analysis  which  follows  pertains 
only  to  the  unlimited  policies.  Since  there  are  two  principal 
policies  of  this  kind  they  will  henceforth  be  designated  as  policy 
"A"  and  policy  "B",  and  In  those  portions  of  the  two  policies 
where  there  Is  a  material  difference  the  clauses  of  each  will  be 
discussed  under  these  headings. 

1.  The  application.^ — Wben  credit  Insurance  Is  desired,  the 
application  is  made  to  the  Insurance  company  for  a  bond  of  in- 
demnity. This  application  contains  statements  on  the  basis  of 
which  the  rejection  or  acceptance  Is  made.  The  applications  are 
alike  for  policy  "A"  and  policy  "B",  and  the  most  important 
statements  contained  therein  are: — 

a.  The  mercantile  agency  whose  ratings  are  used  as  a 
basis  for  the  extension  of  credit. 

b.  The  line  and  nature  of  the  business  and  how  long  In  it. 

c.  Territory  covered. 

d.  Usual  terms  of  sale. 

e.  Contemplated  changes  in  method  of  doing  business. 

f .  The  gross  sales  and  losses  over  the  last  five  or  six  years. 

2.  The  insuring  clause. — The  insuring  clause  of  policy  "A" 
reads  as  follows: 

"-  See  Appendix  CXIII  or  CXIV. 


326    INSURANCE  PRINCIPLES  AND  PRACTICES 

"The Insurance  Company  hereby  guarantees,  under  the  con- 
ditions and  subject  to  the  stipulations  set  forth  on  the  within  pages of 

engaged  in  the  business  of ,  against  loss  due  to 

insolvency  of  debtors,  as  hereinafter  defined,  which  shall  occur  within  a  term 

beginning  the day  of 19 ,   and   ending  the day  of 

19 ,  and  result  from  the  Indemnified's  bona  fide  sales  of  mer- 
chandise shipped  and  delivered  during  said  term  in  the  usual  course  of  business 
to  individuals,  firms,  co-partnerships  or  corporations,  in  the  United  States  of 
America,  or  any  Territory  thereof,  and  in  the  Dominion  of  Canada;  and  which 
is  covered,  proven  and  allowed,  as  is  hereinafter  stipulated.  From  the  aggregate 
net  loss,  ascertained  in  adjustment  as  hereinafter  provided,  there  shall  be  de- 
ducted first  ten  per  cent  (10%)  thereof  as  coinsurance,  and  from  the  remainder 

an  agreed  Normal  Loss  of per  cent.,  to  be  borne  by  the  Indemnified,  upon 

the  total  gross  sales  made  during  said  term;   but  such  Normal  Loss  so  to  be 

deducted  shall  be  not  less  than  $ ;  and  the  remainder,  if  any,  after  said 

deductions,  shall  be  the  loss  payable  by  the  Company." 

Policy  "B"  is  to  the  effect  that: 

"The Insurance  Company  hereby  guarantees,  under  the  conditions  and 

subject  to  the  stipulations  set  forth  on  the  within  pages, of 

engaged  in  the  business  of  ,  against  loss,  due  to  the  insolvency  of 

debtors  as  hereinafter  defined,  which  loss  shall  result  from  the  Indemnified's 
bona  fide  sales  of  merchandise  shipped  and  delivered  during  the  Bond  period, 

beginning  the day  of 19 ,  and  ending  the 

day  of 19....,  to  individuals,  firms,  co-partnerships  or  cor- 
porations, in  the  United  States  of  America,  or  any  Territory  thereof,  and  in 
the  Dominion  of  Canada;  and  which  is  covered,  proven  and  allowed,  as  is  here- 
inafter stipulated;  provided  the  accounts  have  been  placed  with  the  Company 
for  collection  before  they  are  more  than  seventy-five  (75)  days  past  due  under 
the  original  terms  of  sale,  and  provided  further  that  no  account  filed  with  the 

Company  after   the day  of 19....,   shall   be   covered   by  this 

Bond.  From  the  aggregate  gross  loss  so  covered,  proven  and  allowed,  there 
shall  be  deducted,  first,  ten  per  cent  (10%)  thereof  as  coinsurance,  and  then  the 
other  amounts  hereinafter  provided  in  the  method  of  adjustment,  and  from  the 

aggregate  net  loss  thus  ascertained  an  agreed  Normal  Loss  of per  cent,  to 

be  borne  by  the  Indemnified,  upon  the  total  gross  sales  made  during  said  Bond 

period ;  but  such  Normal  Loss  so  to  be  deducted  shall  be  not  less  than  $ ; 

and  the  remainder,  if  any,  after  said  deductions  shall  be  the  loss  payable  by  the 
Company." 

Both  policies  cover  loss  due  to  insolvency  of  debtors  accord- 
ing to  the  definition  of  insolvency  as  stipulated  in  the  policy,  and 
both  provide  for  coinsurance  and  normal  loss;  but  there  are 
great  differences  between  the  two  policies.  Policy  "B"  says  that 
an  account  in  order  to  be  covered  must  be  placed  with  the  in- 
surance company  before  it  is  more  than  75  days  past  due  under 
the  original  terms  of  sale,  while  policy  "A"  does  not  mention 
this  and  makes  such  action  elective  with  the  policy-holder.  This 
is  of  great  value  where  the  insured  does  not  wish  to  take  a  risk 
and  yet  does  not  desire  to  press  his  debtor  by  placing  the  ac- 
count in  the  hands  of  the  insurance  company  for  collection.  It  is 
this  privilege  which  gives  rise  to  the  name  "Optional  Policy."^ 

'  See  Appendix  CXIIL 


CREDIT  INSURANCE  327 

Another  Important  difference  between  the  two  policies  Is  the 
coinsurance  clause.  Policy  "A"  specifies  10  per  cent  deduction 
from  the  net  loss  and  policy  "B"  10  per  cent  deduction  from 
the  gross  loss.  This  will  be  explained  in  detail  under  the  loss 
adjustment. 

3.  The  premium. — The  premium  in  either  case  is  calculated 
in  accordance  with  the  experience  of  the  companies  and  is  based 
on  the  following: 

a.  The  statements  made  in  the  application. 

b.  The  maximum  coverage  for  individual  debtors  with 
specified  ratings. 

c.  Whether  there  is  a  provision  for  the  adjustment  of  the 
premium  on  the  basis  of  gross  sales  or  not. 

d.  The  amount  of  coinsurance. 

e.  The  period  the  policy  is  to  run  (usually  one  year). 

f.  Special  riders  and  endorsements. 

On  policy  "A"  the  entire  premium  for  the  whole  period  is 
determined  and  paid  in  advance,  while  on  policy  "B"  the  pre- 
mium is  a  specified  percentage  of  the  total  gross  shipments  and 
deliveries  made  by  the  indemnified  during  the  period  the  policy 
Is  In  force,  but  such  amount  cannot  be  less  than  the  stipulated 
minimum,  which  minimum  Is  payable  In  advance  and  the  re- 
mainder, if  any,  upon  ascertainment  of  the  amount.  This  means 
that  a  person  holding  policy  "B"  cannot  tell  until  the  end  of  the 
period  how  much  the  contract  Is  going  to  cost,  since  the  total 
sales  will  not  be  known  before  that  time.  It  should  be  men- 
tioned that  even  though  refund  Is  made  by  the  insurer  In  either 
case,  the  adjustment  provided  for  In  policy  "B"  appears  to  be 
the  fairest  means  of  fixing  the  premium,  because  losses  usually 
vary  directly  with  sales  and  It  Is  sometimes  impossible  to  accu- 
rately estimate  for  policy  "A"  the  gross  sales  for  a  whole  year 
In  advance,  so  that  the  premium  for  the  latter  may  frequently 
be  Inexact. 

4.  Coverage. — We  have  mentioned  that  the  Insurance  com- 
pany's application  must  name  a  mercantile  agency  whose  capi- 
tal and  credit  ratings  will  exclusively  govern  the  shipments 
made  under  the  policy.  The  insured  Is  allowed  much  freedom 
of  choice  in  this  matter,  the  ratings  of  any  well-known  agency 
being  acceptable.  The  ratings  of  Bradstreet's  and  R.  G.  Dun 
&  Company  are  the  most  used  and,  because  of  their  importance, 
some  explanation  of  them  will  be  given. 


328    INSURANCE  PRINCIPLES  AND  PRACTICES 

BRADSTREET 


Estimated  Wealth 


Grades  of  Credit 


G. 
H. 


31,000,000  and  a  hove    \ 
500,000  to  31,000,000/' 


AA 


J 400,000  to 

K 300,000  to 

L 250,000  to 

M 200,000  to 

N 150,000  to 

O 100,000  to 

P.... 75,000  to 

Q 50,000  to 

R 35,000  to 


S. 
T. 
U. 


v., 

W. 
X. 


Y. 
Z. 


20,000  to 

10,000  to 

5,000  to 

3,000  to 
2,000  to 

1,000  to 

500  to 
0  to 


500,000 
400,000 
300,000  ■ 
250,000 
200,000 

150,000' 

100,000 

75,000 

50,000 


35,000^ 
20,000 1  • 

io,oooJ 

5,0001 . 
3,000/ 

2,000  . 


B 


B 


D 


D 


D 


1,000 
500 


E 
F 


AA. 

A+. 

A... 

B+. 

B... 

c+. 
c... 

D+ 
D... 

E... 
F... 

G... 
H ... 
J... 

K... 

L ... 
M.. 


Over  31,000,000 Al 

3750,000  to  31,000,000 Al 


500,000  to 

300,000  to 

200,000  to 

125,000  to 

75,000  to 

50,000  to 

35,000  to 

20.000  to 

10,000  to 

5,000  to 
3,000  to 
2,000  to 

1,000  to 

500  to 
Less  than 


750,000 Al 


500,000. 
300,000. 
200,000. 
125,000. 

75,000. 

50,000. 

35,000. 

20,000. 

10,000. 
5,000. 
3,000. 

2,000. 

1,000. 
500. 


1 
1 
1 

IK 

IK 

IK 

2 

2 

2 

2K 
3 

3 
3 
3 


IK 
IK 
IK 

2 

2 

2 

2K 

2K 

2K 

3 

3K 


3K 


3K 


3K 

3K 
3K 


B 


D 


F 


R.  G.  DUN  &  CO. 

Estimated  Pecuniary 

General 

Credit 

Strength 

High      Good 

Fair 

Lt'd. 

2 

2 

2 

2K 

2K 

2K 

3 

3 

3 

3K 
4 

4 
4 

4 


4 
4 


CREDIT  INSURANCE 


329 


It  will  be  noticed  from  these  tables  that  certain  letters  are 
used  to  designate  the  estimated  wealth  or  pecuniary  strength 
of  business  houses.  Bradstreet's  give  three  grades  of  credit, 
while  Dun  gives  four.  The  first  column  of  credit  ratings  in 
either  case  is  known  as  a  first  credit  rating;  the  second  column 
as  the  second  credit  rating,  etc.  For  example,  if  a  firm  is  rated 
A-Al  by  the  R.  G.  Dun  agency,  it  has  estimated  pecuniary 
strength  of  from  $500,000  to  $750,000  and  a  high  or  first 
credit  rating.  Or  if  it  is  rated  NB  in  Bradstreet's  it  means  that 
the  estimated  wealth  is  from  $150,000  to  $200,000  accompa- 
nied by  a  second  credit  rating.  The  heavy  lines  which  separate 
the  different  grades  of  credit  indicate  the  ratings  ordinarily  re- 
quired by  credit  insurance  companies  before  they  will  cover  a 
loss  and  then  only  for  an  individual  debtor  to  the  amount  spec- 
ified in  the  "table  of  ratings"  contained  in  the  policy. 
Practically  any  amount  of  coverage  up  to  the  capital  rating  can 
be  obtained  but  the  premium  charged  for  such  an  amount  is 
so  high  as  to  be  prohibitive.  The  individual  limits,  which  are 
considered  as  conservative  maximums,  are  given  in  the  table 
shown  below,  which  is  typical  of  the  limits  stipulated  in  a  credit 
insurance  policy. 

TABLE  OF  RATINGS  WITH  CONSERVATIVE  MAXIMUM  CREDIT  LIMITS 

(R.  G.  Dun  &  Company) 


Rating 

Gross 

Rating 

Gross 

Gross 

Amount 
Covered 

Amount 
Covered 

Rating 

Amount 

Covered 

Capital 

Credit 

Capital 

Credit 

Capital 

Credit 

AA 

Al 

2100,000 

AA 

1 

S3  5, 000 

F 

2K 

32,500 

A  + 

Al 

75,000 

A 

1 

30,000 

F 

3 

2,000 

A 

Al 

50,000 

A 

1 

25,000 

G 

3 

1,250 

B4- 

1 

45,000 

B 

VA 

20,000 

G 

3K 

1,000 

No  loss  is  covered  under  a  policy  unless  the  debtor  to  whom 
the  goods  were  shipped  and  delivered  shall  have  in  the  latest 
published  book  of  the  chosen  Mercantile  Agency  at  the  date  of 
the  shipment,  a  capital  rating  and  its  accompanying  credit  rat- 
ing as  given  in  the  table  of  ratings  contained  in  the  policy.  If 
the  name  of  the  debtor  does  not  appear  in  the  latest  published 
book,  then  the  latest  report  of  said  agency  shall  govern,  if  that 
report  is  within  a  specified  time  of  the  shipment  (usually  three 
or  four  months). 


330    INSURANCE  PRINCIPLES  AND  PRACTICES 

The  gross  amount  covered  on  any  one  debtor  at  the  date  of 
insolvency  is  limited  to  the  amount  set  opposite  the  correspond- 
ing rating  of  the  debtor  in  the  "table  of  ratings"  attached  to  the 
policy. 

Coverage  is  further  restricted  by  the  operation  of  a  coin- 
surance clause  and  by  the  deduction  of  the  so-called  "normal 
loss."  Both  are  illustrated  in  the  section  on  "adjustment  of 
loss." 

5.  Insolvency. — ^The  insuring  clause  promises  indemnity 
"against  loss  due  to  insolvency  of  debtors  as  hereinafter  de- 
fined." Such  definitions  may  be  divided  into  two  groups;  the 
first  where  the  account  is  filed  with  the  company  for  collection 
and  the  second  when  certain  action  is  taken  which  indicates  the 
inability  of  the  debtor  to  meet  his  obligations.  In  regard  to  the 
first  group,  there  is  a  difference  between  policy  "A"  and  pol- 
icy "B";  in  regard  to  the  second  group,  both  are  alike.  It  will 
be  recalled  that  the  filing  of  an  account  with  the  Insurance  com- 
pany for  collection  Is  optional  with  the  insured  in  policy  "A", 
and  the  indemnified  may  elect  in  this  policy  to  file  such  an  ac- 
count if  it  is  not  over  60  days  past  due  under  the  original  terms 
of  the  sale.  In  Policy  "B"  such  an  account  must  be  filed  before 
it  is  over  75  days  past  due  according  to  the  original  terms  of 
sale.  Such  action  within  the  time  limits  mentioned  constitutes 
insolvency  in  either  policy. 

The  second  group  of  definitions  is  more  or  less  standardized 
and  appears  in  nearly  all  credit  insurance  policies  as  follows: 

( 1 ) .  "When  a  petition  in  bankruptcy  or  insolvency  is  filed 
by  or  against  a  debtor  under  the  laws  of  the  United  States,  or 
any  State  or  Territory  thereof,  or  of  Canada; 

(2).  When  a  debtor  makes  an  offer  of  a  general  com- 
promise to  his  creditors  for  less  than  his  indebtedness; 

(3).  When  a  receiver  Is  appointed  for  a  debtor; 

(4).   In  case  of  the  death  or  Insanity  of  a  sole  debtor; 

(5).  In  case  of  the  recording  of  or  taking  possession 
under  a  chattel  mortgage  given  by  a  debtor  on  his  stock  in  trade 
to  a  creditor  or  creditors; 

(6).  When  an  attachment  or  execution  Is  levied  on  a 
debtor's  stock  In  trade; 

(7).  When  a  writ  of  attachment  or  execution  against  a 
debtor  is  returned  unsatisfied; 

(8).  When  a  debtor  transfers  or  sells  out  his  stock  in 
trade  in  bulk; 


CREDIT  INSURANCE  331 

(9).  When  a  debtor  absconds; 

(10).  When  a  debtor  makes  an  assignment,  or  a  deed  of 
trust,  for  the  benefit  of  his  creditors,  either  general  or  with 
preferences; 

(11).  When  the  stock  in  trade  of  a  debtor  is  sold  under  a 
writ  of  attachment  or  execution; 

(12).  When  a  confession  of  judgment  is  made  by  a 
debtor; 

(13).  When  a  debtor's  business  is  assigned  to  or  taken 
over  by  a  committee  appointed  by  a  majority,  in  number  and 
amount,  of  his  creditors." 

6.  Adjustment  of  loss. — ^When  a  loss  occurs  it  is  necessary 
to  file  a  notification  of  claim  within  a  specified  time  (usually 
15  days)  after  acquiring  knowledge  of  a  debtor's  insolvency, 
and  to  place  the  account  in  the  hands  of  the  company  for  collec- 
tion if  insolvency  occurs  as  defined  in  the  second  group.  If  it 
occurs  as  per  the  first  group  it  will  already  be  in  the  hands  of 
the  company.  The  company  must  also  be  furnished  with  an 
itemized  statement  of  the  account  and  all  papers,  securities,  or 
other  documents  relating  thereto;  and  if  requested,  furnished 
with  invoices,  proofs  of  debt,  affidavits,  or  any  Information  nec- 
essary for  the  proper  handling  of  any  account  in  any  proceed- 
ing and  authorized  to  sue  if  necessary.  The  company  makes  a 
charge  for  this  collection  service  and  a  schedule  of  the  fees  is 
contained  in  the  policy. 

If  a  claim  against  the  company  arises  a  final  state- 
ment of  such  claim  must  be  filed  with  the  company  within  a 
specified  period  after  the  termination  of  the  policy  and  the 
claim  will  then  be  settled.  In  policy  "B"  provision  is  made  for 
an  interim  adjustment  of  claims  arising  under  the  second  group 
of  insolvencies;  a  rider  of  like  nature  can  be  obtained  for  policy 
"A"  if  it  Is  desired. 

The  actual  adjustment  of  the  loss  under  policies  "A"  and  "B" 
can  best  be  understood  by  illustration.  Let  us  assume  that  com- 
pany "X"  is  a  manufacturer  of  small  tools,  with  gross  sales  of 
$1,000,000  a  year.  Suppose  that  on  January  5th,  this  company 
makes  a  shipment  and  delivery  of  $50,000  worth  of  tools  to  the 
"Y"  company,  the  terms  of  the  sale  being  2  per  cent  30  days. 
The  "Y"  company  is  rated  as  AAl  by  the  Dun  Agency  and  the 
policy  specifies  a  maximum  Individual  debtor  liability  of  $75,000 
for  such  a  rating.  On  January  25th  a  receiver  is  appointed  for 
the  debtor,  which  constitutes  insolvency  as  defined  in  the  policy. 


332    INSURANCE  PRINCIPLES  AND  PRACTICES 

If  the  manufacturer  is  protected  under  policy  "A"  the  net  loss 
payable  is  ascertained  in  the  following  manner: 

Gross    loss   covered    and    proven $50,000 

Less:  (1)  All  discounts  to  v^hich  the  debtor  would 
have  been  entitled  had  the  debt  been  paid  at  the 
date  of  insolvency $  2,000 

(2)  All  amounts  collected  thereon  and  all 
amounts  which  may  have  been  obtained  from  any 

other    source    5,000 

(3)  The  amount  of  goods  returned  or  re- 
plevined,  when  such  goods  are  in  the  undisputed 
possession  of  the  Indemnified 12,000 

(4)  All   amounts  mutually  agreed  upon  as 

thereafter  obtainable 1,000  20,000 

30,000 

Less:     10%   Coinsurance    3,000 

Normal  Loss   2,100  5,100 

Amount  payable  under  Policy  "A"..  $24,900 

A  different  result  is  obtained  if  the  loss  has  occurred  under 
policy  "B." 

Gross  loss  covered  and  proven $50,000 

Less:     10%  Coinsurance  5,000 

45,000 
Less.       (1)   All  discounts  to  which  the  debtor  would 
have  been  entitled  had  the  debt  been  paid   at  the 
date  of  insolvency 2,000 

(2)  All  amounts  collected  thereon  and  all 
amounts  which  may  have  been  obtained  from  any 

other    source    5,000 

(3)  The  amount  of  goods  returned  or  re- 
plevined,  when  such  goods  are  in  the  undisputed 
possession  of  the  Indemnified 12,000 

(4)  All   amounts  mutually  agreed   upon   as 

thereafter  obtainable   1,000  20,000 

25,000 
Less  Normal  Loss 2,100 

Amount  payable  under  Policy  "B" $22,900 

It  will  be  remembered  that  the  terms  "normal  loss"  and  "co- 
insurance" appeared  in  the  insuring  clause,  but  they  do  not  be- 
come of  importance  unless  it  is  necessary  to  adjust  a  loss.  To 
understand  their  meaning  some  explanation  is  necessary.  The 
coinsurance  clause  In  credit  insurance  means  that  the  insured  is 
a  coinsurer  to  the  extent  of  the  specified  percentage  (usually  10 


CREDIT  INSURANCE  333 

per  cent)  of  any  loss.  It  is  claimed  by  the  companies  that  some 
coinsurance  is  always  necessary  in  order  to  reduce  the  moral 
hazard  of  taking  unreasonable  risks  in  the  extension  of  credit. 
Notice,  however,  the  difference  in  the  net  result  of  policy  "A"  as 
compared  with  policy  "B",  due  to  the  place  where  coinsurance 
is  deducted.  In  policy  "A"  it  was  not  deducted  until  the  actual 
loss  was  ascertained,  while  in  policy  "B"  it  was  deducted  from 
the  gross  loss  with  the  result  that  there  is  a  net  difference  of 
$2,000  in  the  loss  payable  under  the  two  policies. 

The  normal  loss  is  that  amount  which  is  normally  lost  in  a 
particular  line  of  business  due  to  bad  accounts  and  is  expressed 
in  a  percentage  of  the  gross  sales.  In  some  lines  this  Is  very 
low  (less  than  1/4  of  1  per  cent) ,  and  in  others  quite  high  (one 
per  cent).  Since  this  normal  loss  will  in  all  probability  occur, 
there  is  no  reason  for  insuring  it.  The  amount,  being  known, 
can  be  charged  against  the  cost  of  operation  in  the  same  manner 
as  any  other  overhead  expense.  Consequently  all  credit  insur- 
ance policies  exclude  the  "normal  lo.ss"  from  coverage. 

Another  provision  in  connection  with  the  ascertainment  of  the 
loss  is  to  the  effect  that,  "If  the  indebtedness  of  the  debtor  to 
the  indemnified  at  the  time  of  insolvency  is  not  fully  covered, 
then  the  deduction  shall  be  made  pro  rata,  ie.,  in  the  ratio  which 
the  amount  covered  bears  to  the  whole  of  such  Indebtedness." 
Thus,  If  the  table  of  ratings  In  the  tool  manufacturer's  policy 
showed  a  maximum  coverage  of  only  $40,000  for  an  AAl  rat- 
ing, the  gross  loss  covered  would  be  immediately  cut  to  $40,000, 
and  the  other  items  correspondingly.  This  Is  in  effect  a  coin- 
surance of  100  per  cent  within  the  ordinary  usage  of  the  term 
coinsurance.  When  the  actual  settlement  Is  made  by  the  com- 
pany for  a  loss  the  accounts  so  covered  are  assigned  to  the  com- 
pany to  be  handled  for  the  joint  account  of  the  Indemnified  and 
the  company  as  their  Interests  may  appear.  If  any  amounts  later 
realized  by  the  company  exceed  the  sum  paid  to  the  Indemnified 
the  company  refunds  such  excess. 

7.  Termination. — Policy  "A"  provides  that  "If,  during  the 
term  of  this  Bond,  the  Indemnified  shall  become  insolvent,  or 
shall  cease  to  continue  business  as  heretofore  carried  on,  or  shall 
go  Into  liquidation,  or  being  a  partnership  shall  be  dissolved, 
then  this  bond  shall  immediately  terminate  and  if  any  claim 
for  excess  loss  is  made,  a  Final  Statement  of  Claim  shall  be  filed 
by,  and  an  adjustment  shall  be  made  with,  the  Indemnified  in  the 
same  time  and  manner  as  if  this  Bond  had  originally  by  Its  terms 


334    INSURANCE  PRINCIPLES  AND  PRACTICES 

been  made  to  expire  at  the  date  of  such  termination.  Tempor- 
ary interruption  by  fire  or  by  strike,  or  the  death  or  withdrawal 
or  admission  of  a  member  of  a  partnership  composed  of  more 
than  two  members,  shall  not  be  considered  a  discontinuance  or 
dissolution."  Policy  "B"  makes  provision  for  termination  as  in 
Policy  "A"  and  in  addition  by  either  party  to  the  contract  giv- 
ing ten  days'  written  notice  to  the  other  with  a  proper  adjust- 
ment of  the  premium. 

This  difference  between  the  two  policies  is  possibly  the  most 
important  of  all,  because  under  policy  "B"  the  company  can 
practically  sidestep  liability  if  they  find  a  particular  line  of 
business  is  likely  to  get  into  financial  difficulties;  while  under 
policy  "A"  it  is  impossible  to  avoid  responsibility  because  the 
policy  is  non-cancellable  except  for  the  reasons  given  in  the 
termination  clause. 

8.  Endorsements. — Special  riders  and  endorsements  are 
sometimes  necessary  and  desirable,  and  can  be  obtained  for  an 
additional  premium.  The  most  important  are  those  providing 
for: 

a.  Interim  adjustments  of  claims. 

b.  Coverage  of  additional  sales  prior  to  the  payment  of 
the  premium. 

c.  Coverage  of  inferior  ratings  for  limited  amounts. 

d.  Coverage  of  a  fraction  (2/3  of  the  indebtedness)  of 
the  losses  on  inferior  ratings  for  limited  amounts. 

Advantages  of  credit  insurance. — There  are  many  advan- 
tages of  credit  insurance,  but  among  the  most  important  ad- 
vanced by  the  different  companies  writing  credit  insurance  are 
the  following: 

1.  It  is  equivalent  to  a  contingent  reserve  to  meet  unexpected 
business  losses. 

2.  It  gives  an  established  value  to  the  book  accounts  and  pro- 
tects profits. 

3.  It  furnishes  an  effective  and  efficient  collection  service. 

4.  It  relieves  the  credit  man  of  the  worry  of  handling  an 
overdue  account. 

5.  It  acts  as  collateral  security  against  the  calamities  occur- 
ring to  preferred  customers. 

6.  It  insures  customers  with  inferior  ratings. 

7.  It  enables  the  concern  to  grant  credit  to  a  reliable  firm 
without  fear  of  loss  and  thus  aids  a  healthy  extension  of  credits. 

8.  It  helps  to  prevent  losses. 


CREDIT  INSURANCE  335 

This  last  advantage,  which  the  company  gives  under  the  name 
"salvage,"  is  possibly  more  important  than  any  of  the  others, 
particularly  when  a  concern  is  threatened  with  bankruptcy  by  a 
few  of  its  pressing  creditors  because  of  temporary  financial  em- 
barrassment. A  credit  insurance  company  can  often  prevent 
failure  by  assuming  the  obligation  of  those  creditors  who  are 
policy-holders  and  taking  the  accounts  for  collection.  A  cred- 
itor is  always  in  a  hurry  to  get  his  money  if  he  has  any  question 
as  to  the  ability  of  the  debtor  to  pay,  and  very  frequently  a  con- 
cern may  be  forced  to  liquidate  at  a  great  loss  because  some  of 
these  doubting  creditors  compel  payment  when  an  extension  of 
time  might  have  saved  the  company.  In  such  cases,  a  credit  in- 
surance company,  being  willing  to  wait  for  its  money,  can  take 
over  the  bad  accounts  and  make  payment  to  the  creditors  and 
prevent  what  might  have  been  a  disastrous  failure.  Such  action 
is  often  to  the  advantage  of  the  insurance  company  because  the 
total  loss  sustained  by  them  is  less  than  if  an  expensive  receiver- 
ship or  liquidation  at  a  loss  had  been  precipitated.  Not  only  are 
the  losses  due  to  receiverships  and  the  like  cut  down  but  the  in- 
surance company,  being  a  heavy  creditor,  has  something  to  say 
about  the  management  of  the  unfortunate  concern.  This  usually 
leads  to  a  conservative  handling  of  its  finances  and  resources, 
with  the  result  that  the  business  pulls  through  entirely  or  at 
least  the  maximum  amount  possible  is  salvaged  from  the  wreck. 
It  is  along  this  line  that  the  efforts  of  a  credit  insurance  company 
can  do  the  most  good,  and  as  the  business  grows,  and  more  and 
more  concerns  carry  credit  insurance,  an  extension  of  such  serv- 
ices will  be  made,  much  to  the  benefit  of  the  entire  community. 


Chapter  XXIII 

CORPORATE  BONDING 

Development  of  corporate  suretyship. — Bonding  is  one  of 
the  oldest  forms  of  insurance.  As  far  back  as  history  extends 
it  has  been  customary  for  persons  to  become  surety  for  the 
actions  of  others.  The  first  attempt  to  organize  a  company 
to  perform  this  function  appears  to  have  been  made  in  London 
in  1720,  when  a  society  was  formed  to  insure  masters  against 
loss  through  the  dishonesty  of  their  servants.  In  1840  the 
first  real  fidelity  company  was  organized  in  England,  and  in 
1853  the  State  of  New  York  authorized  the  formation  of 
companies  for  accepting  fidelity  and  surety  risks.  In  1876 
a  company  availed  itself  of  this  privilege  but  did  not  begin 
business  until  three  years  later,  although  a  Canadian  corpora- 
tion had  already  begun  to  write  fidelity  business  in  Canada. 
At  first  it  was  felt  that  corporate  surety  lacked  that  "moral" 
element  which  was  supposed  to  be  present  in  personal  surety, 
but  corporate  sureties  were  gradually  accepted  for  legal  pur- 
poses and  at  the  present  time  the  total  premium  income  from 
this  class  of  business  totals  over  $25,000,000  annually.  The 
advantages  of  .corporate  surety  are  now  recognized  by  every 
one  who  has  given  any  thought  to  the  subject;  but  many  still 
heedlessly  subject  themselves  to  loss  by  becoming  personal 
sureties  for  "friends."  In  order  to  examine  the  advantages 
of  corporate  surety  we  must  first  define  the  contract. 

Nature  of  suretyship. — A  bond  is  a  written  contract  whereby 
one  party  promises  to  hold  himself  responsible  for  the  acts  or 
neglect  of  another,  with  respect  to  some  contract  or  legal  re- 
lation between  the  latter  and  a  third  party.  The  party  hold- 
ing himself  responsible  is  called  the  "surety."  In  corporate 
bonding  the  surety  is  a  corporation.  The  party  for  whose 
acts  or  neglect  the  surety  is  responsible  is  called  the  "prin- 
cipal" or  "obligor,"  and  may  be  an  employee,  a  public  officer, 
a  contractor,  a  person  acquiring  a  license,  etc.  The  party 
who  is  protected  by  the  bond  is  called  the  "obligee,"  and  may 
be  an  employer,  the  state,  a  person  who  lets  a  contract,  etc. 

336 


CORPORATE  BONDING  337 

There  are  several  differences  between  bonding  and  insurance 
which  are  worthy  of  note.  We  found  insurance  to  be  a  co- 
operative method  of  indemnifying  for  losses,  some  of  which 
were  certain  to  occur  and  could  be  more  or  less  accurately 
predicted.  Bonding  is  selling  the  use  of  the  surety's  name 
and  credit;  the  risks  are  carefully  selected  and  it  is  assumed 
that  there  will  be  no  losses.  There  are,  of  course,  some  losses, 
but  this  is  because  it  is  not  always  possible  to  distinguish  safe 
from  unsafe  risks.  The  insurance  contract  is  between  two 
parties  and  may  be  terminated  at  any  time  by  mutual  consent; 
a  bond  is  given  for  the  protection  of  a  third  party  and  usually 
can  be  cancelled  only  with  the  consent  of  the  obligee  and, 
where  subject  to  statute  provisions,  sometimes  not  then.  In 
insurance  the  company  is  subrogated  to  rights  which  only 
occasionally  enable  it  to  reduce  its  losses;  In  bonding  the  prin- 
cipal is  nearly  always  legally  liable  for  the  losses  the  surety 
is  called  upon  to  pay,  and  the  latter  can  always  have  recourse 
against  the  former,  though  practically  this  privilege  may  not 
be  worth  much.  This  has  been  well  expressed  by  the  state- 
ment that  "There  is  always  a  person  between  the  surety  and 
its  liability."  In  spite  of  this  bonding  companies  are  fre- 
quently viewed  by  the  courts  as  insurers  rather  than  sureties 
and  regarded  as  liable  to  make  good  defaults  under  nearly  all 
circumstances. 

Advantages  of  corporate  bonding. — The  advantages  of  cor- 
porate, as  compared  with  personal,  bonds  may  be  viewed  from 
the  standpoint  of  the  principal,  the  surety  and  the  obligee. 

1.  From  the  standpoint  of  the  principal. — The  principal, 
by  asking  a  friend  to  become  his  surety,  is  placed  in  a  dependent 
position.  The  surety  ordinarily  receives  no  compensation  and 
considers  himself  as  doing  the  principal  a  favor,  which  in 
fact  he  is,  and  a  very  great  one.  If  the  principal  is  weak  and 
the  surety  unscrupulous,  the  latter  may  subsequently  unduly 
influence  the  former  in  the  discharge  of  his  duties.  Further- 
more, the  principal  is  obligated  to  reciprocate  by  performing 
some  unknown  favor  for  the  surety,  if  required. 

2.  From  the  standpoint  of  the  surety. 

a.  Without  recompense  the  personal  surety  assumes  a  lia- 
bility, the  extent  of  which  is  seldom  recognized.  The  bond- 
ing company  makes  a  business  of  assuming  liability.  The  per- 
sonal surety  virtually  becomes  the  endorser  of  a  note  of  in- 
definite term;  he  may  create  a  lien  on  his  property  which  ren- 


338    INSURANCE  PRINCIPLES  AND  PRACTICES 

ders  it  unsaleable  for  a  long  period;  he  may  become  involved 
in  litigation.  The  companies  transacting  a  bonding  business 
paid  out  millions  in  losses  in  1920  on  carefully  selected 
risks — how  unlikely  it  is  that  an  individual  who  becomes  surety 
will  escape  loss  !  One  writer  has  said  that  "the  man  who  asks 
another  to  sign  his  bond  without  adequately  securing  him  is 
on  a  par  with  him  who  borrows  money  from  his  friend  without 
intending  to  pay  it  back." 

b.  The  personal  surety  can  exercise  little  or  no  oversight 
over  the  actions  of  the  principal  and  cannot  control  such  ac- 
tions in  any  way,  whereas  the  corporate  surety  makes  it  a 
business  to  prevent  losses  if  possible. 
3.  From  the  standpoint  of  the  obligee. 

a.  The  standing  of  an  individual  surety  is  usually  very 
uncertain,  and  the  obligee  usually  makes  very  inadequate  in- 
vestigation of  his  standing,  whereas  the  corporation  is  usually 
a  well-known  institution.  Where  the  principal  proves  to  be 
irresponsible  the  individual  surety  is  generally  likewise  irre- 
sponsible. 

b.  The  individual  surety's  financial  standing  is  subject  to 
change,  even  though  good  at  the  time  the  bond  is  given.  He 
may  become  insolvent  or  die.  The  obligee  is  usually  unable 
to  watch  his  condition  so  as  to  prevent  loss;  and  when  the 
surety  is  called  upon  he  is  found  to  have  no  property  or  a 
transfer  to  other  persons  has  rendered  such  property  unavail- 
able. 

c.  There  is  always  the  potential  danger  that  the  surety  will 
contest  his  liability  and  provoke  a  long  legal  dispute.  The 
reputation  of  the  company  depends  upon  the  prompt  settle- 
ment of  losses. 

d.  Corporations  are  supervised  by  the  State  and  publish 
periodical  reports. 

e.  The  supervision  exercised  by  the  corporate  surety  over 
the  principal  and  the  safeguards  required  for  a  bond  greatly 
diminish  the  possibility  of  loss. 

Divisions  of  the  subject. — Bonding  is  often  divided  into  two 
sections — fidelity  and  surety  risks.  This  is  the  classification 
quite  generally  adopted  by  State  insurance  departments.  Fi- 
delity risks  are  considered  as  including  chose  Adhere  the  surety 
guarantees  the  honesty  of  the  principal,  whereas  the  surety 
bond  guarantees  the  willingness  and  ability  of  the  principal  as 


CORPORATE  BONDING  339 

well  as  his  honesty.     A  more  useful  classification,  however, 
will  be  to  classify  risks  into  five  groups  as  follows: 

1.  Bonds  covering  honesty  only. 

a.  Fidelity  bonds,  usually  guaranteeing  the  honesty  of  em- 
ployees. 

b.  Bonds  for  assignment  of  accounts,  guaranteeing  the 
character  of  the  accounts. 

2.  Bonds  covering  financial  strength  only,  i.e.,  court  bonds 
of  various  kinds,  including 

a.  Appeal  or  supersedeas  bonds.  ^ 

b.  Bonds  for  costs. 

c.  Attachment  bonds,  etc. 

3.  Bonds  covering  honesty  and  ability. 

a.  Public  official  bonds,  covering  the  honesty  and  ability  of 
those  holding  public  offices. 

b.  Fiduciary  bonds,  covering  the  honesty  and  ability  of 
legal  representatives,  such  as  trustees,  receivers,  etc. 

c.  License  bonds,  covering  the  honesty  and  ability  of  per- 
sons licensed  by  the  State. 

d.  Immigrant  bonds,  guaranteeing  the  production  of  im- 
migrants when  required. 

4.  Bonds  covering  honesty,  ability  and  financial  strength. 

a.  Contract  bonds,  which  guarantee  the  doing  of  a  piece 
of  work. 

b.  Franchise  bonds,  guaranteeing  compliance  with  the 
terms  of  the  franchise. 

c.  Depository  bonds,  guaranteeing  compliance  with  duties 
owing  to  depositors. 

5.  Bonds  covering  honesty  and  financial  strength. 

a.  Bonds  protecting  against  reappearance  of  lost  instru- 
ments. 

b.  Miscellaneous  credit  guarantees,  such  as  mechanics' 
lien  bond,  rent  guarantee,  bonds  for  freight,  bonds  for  future 
delivery  of  merchandise,  etc. 

The  reason  for  this  classification  will  be  made  clear  by  the 
following  discussion : 

Bonds  covering  honesty. — Fidelity  honds.^ — The  fidelity 
bond  in  general  guarantees  honesty,  and  the  great  mass  of  such 
bonds  are  issued  to  cover  employees  and  persons  holding  posi- 
tions of  trust.  Included  in  this  group  are  cashiers,  book- 
keepers, bank  employees,  managers,  conductors,  drivers,  treas- 

*  See  Appendices  CXV  and  CXVI. 


340    INSURANCE  PRINCIPLES  AND  PRACTICES 

urers,  collectors,  union  officials,  officials  of  building  and  loan 
associations,  fraternal  orders,  charitable  associations  and  social 
clubs.  The  ordinary  bond  covers  dishonesty  in  the  form  of 
larceny  or  embezzlement;  but  some  bonds  are  issued  also  cov- 
ering forgery,  misappropriation,  wrongful  abstraction  and 
wilful  misapplication.  Whether  this  latter  coverage  is  appre- 
ciably greater  than  the  former  is  difficult  to  say. 

The  employee  who  is  to  be  the  principal  makes  application 
to  the  company  for  a  bond  and  furnishes  on  the  application 
certain  information  which  is  necessary  in  order  to  form  a 
judgment  on  the  risk.  This  gives  the  dates  of  the  principal 
events  in  the  applicant's  life  and  some  particulars  about  his 
family,  recites  his  experience  in  business,  his  assets  and  liabili- 
ties, his  personal  habits,  the  amxount  of  insurance  he  carries, 
and  the  conditions  surrounding  his  business  position  in  a  gen- 
eral way.  He  agrees  in  the  application  to  pay  the  premium  in 
advance  and  to  reimburse  the  surety  for  any  loss  it  may  suffer 
on  his  account.  The  employer  is  also  required  to  furnish  a 
statement  which  gives  his  knowledge  of  the  applicant,  the  con- 
ditions under  which  he  is  employed,  his  authority  in  financial 
matters,  etc.  These  statements  furnish  the  surety  with  con- 
siderable information,  as  well  as  a  starting-point  for  its  in- 
vestigation. 

The  hazards  surrounding  fidelity  risks  may  be  divided  into 
two  groups,  moral  and  physical.  As  to  the  moral  hazards 
it  is  found,  for  example,  as  might  be  expected,  that  persons 
with  criminal  records  or  "sporty"  tendencies  do  not  constitute 
the  best  grade  of  risks.  The  applicant's  personality,  antecedents, 
environments,  habits  and  financial  conditions  are  all  factors 
to  be  considered.  On  the  other  hand,  the  physical  conditions 
under  which  he  works  are  equally  important.  The  amount 
of  money  he  handles,  the  opportunity  which  is  afforded  for  ap- 
propriating it,  the  extent  of  his  control  over  his  employer's 
funds,  whether  an  inadequate  wage  contributes  its  inducement 
to  dishonesty,  and  whether  the  employee  is  personally  liable  for 
shortages  which  occur,  are  all  important  considerations.  For 
illustration,  let  us  assume  that  the  employee  is  responsible  for 
shortages.  In  the  first  place,  it  is  very  difficult  to  tell  whether 
a  shortage  represents  a  misappropriation  by  the  employee  or 
not;  secondly,  a  claim  will  always  be  made  for  the  whole  short- 
age without  any  allowances  for  the  inevitable  losses;  and 
thirdly,  the  employer  will  probably  collect  all  he  can  from  the 


CORPORATE  BONDING  341 

employee  and  leave  the  surety  with  small  hope  of  reimburse- 
ment. As  another  illustration  of  the  importance  of  the  physical 
elements,  countersignatures  and  audits  will  frequently  so  reduce 
both  the  opportunities  for  misappropriation  and  the  amounts 
available  as  to  make  a  risk  practically  negligible,  while  the  ab- 
sence of  these  factors  may  make  the  hazard  prohibitive. 

Three  types  of  bonds  are  issued  for  fidelity  risks;  namely, 
(1)  the  individual  form,  which  covers  one  person  holding 
a  definite  position;  (2)  the  schedule  form,  where  the  employ- 
ees covered  are  shown  on  a  schedule  or  list,  the  liability  of  the 
surety  on  each  being  indicated;  and  (3)  the  blanket  form, 
where  any  and  all  employees  are  covered  up  to  the  full  amount 
named  in  the  bond.  The  latter  Is  now  very  little  used  be- 
cause it  is  not  desirable  from  the  standpoint  of  the  surety, 
and  the  employer  unnecessarily  pays  for  an  excessive  amount 
of  coverage  on  minor  employees. 

In  respect  to  the  scope  of  the  coverage  fidelity  bonds  may 
be  divided  into  two  groups,  as  referred  to  previously: 

a.  Bonds  covering  dishonesty. 

b.  Bonds  covering  dishonesty  and  "culpable  negligence." 
Culpable  negligence  Is  defined  in  the  bond. 

The  bond  covers  the  employer  for  a  specified  period  of 
time  and  for  a  specified  amount  on  each  employee  named  In 
the  policy.  If  the  employer  is  protected  by  more  than  one 
bond  on  the  same  employees  he  can  recover  from  each  com- 
pany only  that  proportion  of  any  loss  which  Its  Insurance  bears 
to  the  total  Insurance,  collectible  or  uncollectible.  The  policy 
agrees  to  Indemnify  only  for  embezzlement  or  larceny  by  em- 
ployees and  then  only  for  such  acts  as  are  committed  within  the 
term  of  the  bond  or  its  renewal  and  discovered  within  the 

term  of  the  bond  or  within  six  months  after  expiration  of  the 
term,  or  the  death,  dismissal  or  retirement  of  the  employee. 
The  employer  agrees  that  his  statements  In  the  application 
shall  be  considered  a  part  of  the  contract,  that  the  company 
has  the  privilege  of  cancelling  the  bond  upon  three  months' 
notice  and  return  of  the  pro  rata  premium,  that  the  liability 
shall  cease  if  the  employee's  duties  are  increased,  that  he  will 
give  immediate  notice  of  the  discovery  of  the  employee's  dis- 
honesty or  his  Indulgence  In  speculation  or  gambling,  that  he 
furnish  full  particulars  of  any  dishonesty  on  the  part  of  the 
employee  within  three  months  after  discovery  of  the  same, 
and  that  he  will  furnish  all  the  aid  and  assistance  In  his  power 


342    INSURANCE  PRINCIPLES  AND  PRACTICES 

(other  than  pecuniary)  to  bring  the  wrongdoer  to  justice. 
Many  of  the  bonds  referred  to  subsequently  are  somewhat 
similar  in  their  provisions,  and  space  will  not  permit  reference 
to  them  in  the  same  detail  as  we  have  given  this  bond. 

2.  Account  bonds. — Where  a  merchant  sells  his  accounts  re- 
ceivable the  purchaser  may  demand  a  bond  guaranteeing  such 
accounts.  A  surety  may  Issue  a  bond  guaranteeing  that  no 
wholly  fictitious  accounts  will  be  intentionally  sold  and  as- 
signed. This  Is  small  protection  but  It  is  as  far  as  a  surety 
can  go  without  invading  other  fields  of  insurance.  The  prin- 
cipal factor  involved  Is  the  honesty  of  the  applicant. 

Bonds  involving  financial  strength  only. — Court  bonds. — 

1.  Appeal  bonds. — Where  there  Is  a  judgment  at  law  against 
an  individual  and  he  desires  to  appeal  the  case  to  a  higher 
court,  It  is  necessary  to  give  a  bond  to  avoid  the  execution  of 
the  judgment.  The  surety  undertakes  that  the  principal  will 
execute  the  orders  of  the  court  or,  In  the  event  of  his  failure 
to  do  so,  the  surety  will  satisfy  the  resulting  damages.  Such 
a  bond  is  for  the  protection  of  the  party  who  has  won  the  case 
in  the  lower  court  and  the  hazard  varies  with  the  financial 
resources  of  the  principal. 

2.  Bonds  for  costs. — It  is  frequently  necessary  to  deposit 
a  bond  for  court  costs  in  order  to  institute  a  suit.  The  surety 
agrees  that  the  litigant  will  pay  the  costs  of  the  suit,  if  re- 
quired, or  will  himself  pay  them.  Again  financial  resources 
are  the  important  feature  of  hazard. 

3.  Attach^nent  bonds.  Under  certain  circumstances,  as  a 
protection  to  a  litigant,  property  may  be  attached  in  advance 
of  a  decision  on  the  case,  but  a  writ  of  attachment  Is  not  issued 
unless  a  bond  is  furnished  that  if  the  writ  is  unjustifiably  issued 
the  defendant  shall  be  reimbursed  for  any  damages  he  sus- 
tains by  reason  of  such  Issuance. 

4.  Injunction  or  mandamus  bond. — Where  an  order  of  the 
court  is  requested  preventing  a  certain  act  or  requiring  a  cer- 
tain act,  a  bond  Is  required  to  cover  the  possible  damage  to 
the  party  against  whom  the  mandamus  or  Injunction  is  issued, 
in  case  same  is  wrongfully  Issued. 

5.  Replevin  bonds,  covering  damages  for  wrongful  seizure 
of  property  by  the  sheriff. 

6.  Bonds  for  distraint  of  rent,  covering  damages  in  case  a 
tenant's  goods  arc  wrongfully  distrained  for  rent. 

7.  Indemnity  bonds  to  sheriff  in  seizing  property. 


CORPORATE  BONDING  343 

8.  Many  other  such  bonds  might  be  named,  such  as  a  li- 
bellant's  bond  in  admiralty,  a  bond  to  release  a  libel,  a  bond 
for  the  appointment  of  a  receiver,  a  bond  for  a  petition  in 
bankruptcy,  removal  bonds,  bail  bonds,  a  bond  on  the  sale 
of  real  estate  of  a  deceased  person  before  the  expiration  of 
time  for  filing  claims,  a  bond  of  a  legatee  to  pay  the  debts  of 
the  testator,  etc. 

These  bonds  in  general  are  designed  to  protect  the  opposing 
party  in  litigation  from  damage  in  case  the  plaintiff  fails  to 
make  out  the  case  alleged,  and  the  surety  engages  to  do  that 
which  the  unsuccessful  plaintiff  should  do,  which  is  usually  to 
pay  damages.  Naturally  the  surety  attempts  to  force  the  plain- 
tiff to  perform  his  legal  duty,  and  if  he  is  financially  able  to 
do  so,  no  loss  falls  on  the  surety.  These  bonds,  therefore, 
are  little  concerned  with  the  moral  hazard  and  are  dependent 
almost  entirely  upon  the  financial  strength  of  the  principal. 
The  surety  usually  protects  itself  by  requiring  the  principal 
to  deposit  collateral  with  It  and.  If  possible,  obtains  collateral 
up  to  the  full  amount  of  the  bond. 

Bonds  involving  honesty  and  ability. — 1.  Public  official 
bonds. — The  law  requires  that  persons  elected  to  fill  public 
positions  of  trust  shall  deposit  bonds  for  the  faithful  per- 
formance of  their  duty.  We  might  take  as  an  Illustration 
a  state  treasurer,  a  tax  collector  or  a  sheriff.  Under  such 
bonds  the  surety  obviously  guarantees  more  than  on  bonds  of 
either  of  the  two  classes  previously  referred  to,  for  the  first 
group  Involves  honesty  only,  while  the  second  Involves  finan- 
cial strength  only.  A  bond  on  a  public  ofl'icial  not  only  pro- 
tects against  fraud  and  dishonesty,  but  guarantees  that  he  will 
do  those  things  which  are  required  by  law,  and  failure  to  do 
the  latter  may  be  due  to  omission  to  perform  duties  specified, 
commission  of  acts  not  authorized  or  performance  In  a  form 
other  than  that  prescribed.  These  unfortunate  contingencies 
may  happen  either  through  his  dishonesty,  negligence  or  lack 
of  ability. 

The  risk  assumed  by  the  surety  Is  Increased  by  two  facts : 

a.  The  liability  of  the  surety  Is  prescribed  by  law  and  can- 
not be  reduced  by  any  provisions  Inserted  In  the  bond. 

b.  The  bond  usually  covers  the  full  term  of  oflice,  and  since 
the  surety  is  protecting  the  people  of  the  State  the  bond  can- 
not be  cancelled  without  their  consent,  which  Is  difficult  to 
obtain,  although  statutes  for  this  purpose  exist  in  some  States. 


344    INSURANCE  PRINCIPLES  AND  PRACTICES 

This  type  of  bond,  like  the  fidelity  bond,  obviously  involves 
two  groups  of  hazards,  the  personal  and  the  physical.  The 
first  question  relates  to  the  honesty  of  the  applicant.  But 
his  efficiency  is  equally  important  and  yet,  in  many  cas^s,  per- 
sons are  elected  to  offices  entailing  work  with  which  they  are 
absolutely  unfamiliar  and  are  sometimes  even  taken  from  farms 
and  workshops  to  fill  positions  requiring  clerical  ability,  ac- 
counting knowledge  and  financial  experience.  If  the  person 
has  financial  resources  of  his  own  the  risk  is  greatly  lessened, 
because  he  will  take  more  care  if  he  runs  the  risk  of  losing 
his  own  money.  The  physical  aspect  of  the  hazard  includes 
his  opportunities,  temptations  and  liabilities.  The  amount  of 
money  handled  and  the  system  employed  are  obviously  very 
important.  Take,  for  example,  a  tax  collector  who,  before 
he  is  required  to  account  for  the  first  fund  collected,  begins  to 
receive  second  payments.  Nothing  is  easier  than 'to  supply 
a  shortage  in  the  first  fund  by  amounts  collected  on  second 
payments,  and  to  cover  second  shortages  by  third  collections, 
until  the  defalcation  reaches  an  enormous  sum.  This,  in  fact, 
is  the  way  in  which  most  large  losses  occur,  as  any  accountant 
will  testify.  A  similar  situation  arises  where  it  is  possible  for 
an  officer  to  transfer  sums  from  one  fund  to  another,  so  that 
any  one  fund  audited  will  be  found  intact,  any  shortage  being 
temporarily  supplied  from  another  fund,  which  in  turn  is  re- 
imbursed when  necessity  arises.  A  principal  may  hold  office 
two  terms  and  a  shortage  in  the  first  term  may  be  made  good 
by  sums  abstracted  from  second-term  funds.  The  surety  on 
the  second  term  would  be  liable  for  this  loss.  In  regard  to 
his  liabilities,  the  officer  usually  gives  bond  that  he  will  account 
for  and  pay  over  all  moneys  received.  If,  therefore,  a  bank 
fails  in  which  he  deposits  money,  even  though  he  exercised 
care,  his  surety  would  be  liable.  Sometimes  it  is  provided  that 
the  funds  must  be  deposited  in  certain  named  and  bonded 
banks  and  the  officer  relieved  of  responsibility;  in  such  a  case 
the  only  supervision  necessary  is  to  see  that  every  detail  of  the 
law  is  complied  with.  The  principal  is  usually  liable  for  the 
dishonesty  of  his  subordinates;  the  protection  against  such  de- 
falcation is  to  require  bonds  from  them.  As  an  example  of 
the  possibility  of  inefficiency  we  might  mention  the  possibility 
that  a  recorder  who  is  unfamiliar  with  clerical  work  may  fail 
to  record  or  to  record  properly  a  judgment  or  legal  paper 
and  through  loss  to  a  third  party  his  surety  will  become  liable; 


CORPORATE  BONDING  345 

or  the  liability  of  a  surety  for  the  inefficiency  of  a  tax  collector 
and  consequent  failure  to  collect  taxes  due;  or  the  inefficiency 
of  a  sheriff,  resulting  in  damage  to  a  third  party. 

2.  Fiduciary  Bonds. — llicre  is  a  great  variety  of  these 
bonds,  all  characterized  by  the  fact  that  the  principal  is  in 
each  case  an  individual  who  is  entrusted  with  the  safekeeping 
of  funds  for  the  benefit  of  another.  Thus,  there  are  bonds 
for  administrators,  executors,  trustees,  guardians,  receivers, 
trustees  in  bankruptcy,  assignees  for  the  benefit  of  creditors, 
and  conservators.  Such  trust  relations  are  described  as  long- 
term  trusts  and  short-term  trusts,  the  latter  being  duties  which 
can  ordinarily  be  completed  within  two  years. 

It  will  be  apparent  that  most  of  what  has  been  said  regard- 
ing public  officials  is  applicable  to  fiduciaries.  A  receiver,  for 
example,  is  an  officer  of  the  court  riequired  to  administer  the 
property  in  his  possession  in  the  manner  directed.  The  sur- 
ety binds  itself  to  see  that  this  is  done  or  to  pay  the  damages. 
This  involves  honesty  and  ability  on  the  part  of  the  principal. 
The  principal  is  required  to  follow  the  direction  of  the  court 
or  the  statutes  of  the  State,  but  he  may  be  entirely  unfamiliar 
with  the  method  of  settling  debts,  collecting  the  assets,  pre- 
paring an  inventory  of  property,  rendering  accounts  to  the 
court,  investment  of  funds  and  releasing  himself  from  liability. 
It  is  very  easy,  therefore,  for  him  to  take  some  action  which 
will  render  himself  and  his  surety  liable.  It  is  now  the  general 
practice,  however,  for  sureties  to  require  of  such  principals 
that  the  estate  or  trust  fund  be  placed  under  the  joint  control 
of  the  principal  and  the  surety,  in  which  case  securities  are 
placed  in  a  safe  deposit  box  subject  to  their  joint  order,  while 
funds  are  similarly  safeguarded  by  deposit  in  a  bank. 

3.  License  bonds. — In  every  State  licenses  arc  required  of 
persons  engaging  in  certain  occupation — money  lenders,  em- 
ployment agents,  auctioneers,  nurserymen,  plumbers,  ware- 
housemen, users  of  explosives,  electricians,  draymen,  theater 
operators,  engineers,  and  formerly  liquor  dealers.  ^  The  ob- 
ject of  these  bonds  and  the  obligation  of  the  surety  is  to  pro- 
tect the  State  and  the  public  from  damage  arising  from  the 
manner  in  which  the  business  is  conducted.  The  proper  con- 
duct of  business  in  these  cases  is  usually  dependent  upon 
the  honesty  and  ability  of  the  principal,  which  Is  the 
reason  for  placing  these  bonds  In  this  class.  There  Is  per- 
haps an  element  also  of  financial  responsibility,  but  this  is  a 


346    INSURANCE  PRINCIPLES  AND  PRACTICES 

minor  one.  Of  the  various  bonds  cited  above  some  will  be 
recognized  as  much  more  hazardous  than  others,  and  some 
are  so  risky  that  corporate  sureties  almost  invariably  decline 
them  without  special  protection  of  some  kind. 

Bonds  involving  honesty,  ability  and  financial  strength. — 
1.  Contract  Bonds.^ — The  principal  in  this  case  has  con- 
tracted to  do  a  piece  of  work  for  the  obligee  and  the  surety 
makes  itself  liable  if  such  work  is  not  completed.  This  is 
more  of  a  credit  and  banking  proposition  than  an  insurance 
enterprise,  because  the  surety  endorses  the  contract  somewhat 
as  a  business  man  endorses  a  note.  The  contractor  in  order 
to  fulfill  his  obligations  must  be  honest,  must  make  an  intelli- 
gent bid,  and  must  have  the  ability  and  financial  strength  to 
complete  his  contract,  all  of  which  the  surety  guarantees.  The 
latter  must  therefore  scrutinize  the  nature  of  the  work  to  be 
done,  the  contract  price,  the  proportion  of  completed  and  un- 
completed work,  the  conditions  under  which  the  contractor  is 
to  receive  his  pay,  and  the  age  and  financial  standing  of  the 
contractor.  It  is  customary  to  require  that  the  available  as- 
sets of  the  contractor  shall  be  five  times  the  amount  of  un- 
completed work  for  which  he  is  liable. 

For  this  purpose  there  are  two  forms  of  bonds  in  use,  as  fol- 
lows : 

a.  Where  the  obligation  of  the  surety  is  void  if  the  con- 
tractor shall  "faithfully  perform  said  contract  according  to 
the  terms,  covenants  and  conditions  thereof";  and 

b.  Where  the  obligation  is  void  if  the  "principal  shall  in- 
demnify the  obligee  against  any  loss  or  damage  directly  aris- 
ing by  reason  of  the  failure  of  the  principal  to  faithfully  per- 
form said  contract."  The  first  is  a  bond  for  specific  perform- 
ance, the  second  a  bond  for  damages. 

The  ordinary  provisions  of  a  contract  bond  are  as  follows: 

a.  That  the  surety  shall  be  promptly  notified  of  any  failure 
on  the  part  of  the  principal  for  which  it  may  be  liable. 

b.  That  the  surety  shall  have  the  right  to  assume  and  com- 
plete the  contract  upon  default  of  the  contractor  and  be  sub- 
rogated to  his  rights  under  the  contract. 

c.  The  surety  is  to  be  liable  only  to  the  obligee,  in  order 
that  it  may  not  be  proceeded  against  by  mechanics  and  material 
men. 

'  See  Appendix  CXVII. 


CORPORATE  BONDING  347 

d.  That  the  obligee  shall  retain  the  last  payment  for  the 
work  until  the  contract  is  satisfactorily  completed. 

e.  That  the  surety  shall  not  be  liable  for  acts  of  Provi- 
dence or  damage  by  mobs,  riots,  civil  commotions,  public  ene- 
mies, strikes,  fire,  lightning,  tornadoes  or  cyclones. 

f.  The  surety  must  be  notified  of  any  changes  in  the  con- 
struction plans. 

g.  The  bond  does  not  cover  efficiency,  wearing  qualities  or 
maintenance  of  the  work. 

h.   That  all  insurance  carried  shall  share  losses  pro  rata. 
i.  That  any  legal  action  under  this  bond  will  be  taken 
within  a  limited  time. 

Another  variety  of  contract  bond  is  the  "bid"  or  "proposal" 
bond  which  guarantees  that  ( 1 )  if  the  bidder  is  successful  he 
will  furnish  a  contract  bond  for  the  completion  of  the  work 
and  (2)  the  bid  bond  shall  serve  as  such  final  bond.  In  ad- 
dition to  the  hazards  of  the  contract  bond  this  bond  has  the 
disadvantage  to  the  surety  that  his  information  is  much  more 
restricted  than  under  the  latter  form  of  bond. 

2.  Franchise  Bonds. — It  Is  usually  the  practice  to  require 
the  corporation  to  whom  a  franchise  Is  granted  for  the  oper- 
ation of  a  public  utility  to  deposit  a  bond  guaranteeing  the 
construction  or  operation  of  the  utility  within  a  specified  time. 
The  entire  amount  of  the  bond  Is  considered  as  liquidated 
damages  In  case  of  default.  It  Is  customary  to  require  col- 
lateral security  for  such  bonds  unless  a  contract  for  the  work 
Is  given  to  a  contractor  who  is  bonded.  The  hazard  Is  great 
because  the  franchise  may  be  sold  to  a  third  party,  the  original 
grantee  may  be  financially  or  otherwise  unable  to  produce  the 
utility  within  the  time  required  and,  in  case  of  default,  the 
whole  amount  of  the  bond  is  usually  lost.  This  type  of  bond, 
like  the  contract  bond,  therefore  Involves  the  honesty,  ability 
and  financial  strength  of  the  principal. 

3.  Depository  bonds. — These  bonds  are  required  by  deposi- 
tors to  guarantee  that  their  money  will  be  promptly  paid  to 
them  on  legal  demand,  the  principal  reason  for  failure  to  pay 
on  demand  being  the  Insolvency  of  the  bank.  This  insol- 
vency of  the  bank,  which  is  the  principal,  may  arise  from  dis- 
honesty on  the  part  of  the  management,  lack  of  ability  or 
want  of  financial  strength.  Depository  bonds  belong  there- 
fore, in  the  class  of  contract  and  franchise  bonds.  They  are 
usually  required  where  public  funds  are  deposited,   and  the 


348    INSURANCE  PRINCIPLES  AND  PRACTICES 

State  is  often  made  by  law  a  preferred  creditor  in  case  of  fail- 
ure, with  the  privilege  of  receiving  its  entire  deposit  before 
all  other  payments.  This  very  greatly  reduces  the  surety's 
chance  of  loss.  There  are  two  other  instances,  however, 
where  the  surety  is  not  so  favorably  treated.  In  the  case  of 
the  ordinary  depositor  the  surety  shares  with  the  other  depos- 
itors in  the  distribution  of  the  assets.  A  depositor  whose 
funds  in  a  bank  exceed  the  amount  of  the  bond  is  entitled  to 
the  payment  of  the  full  amount  of  the  excess  before  the  surety 
is  entitled  to  anything;  notwithstanding  the  latter  pays  the  full 
amount  of  the  bond.  The  surety,  therefore,  usually  provides 
in  the  bond  that  it  shall  be  entitled  to  its  share  of  any  salvage. 
Bonds  of  this  character  may  be  divided  into  two  classes  ac- 
cording to  the  scope  of  protection  they  afford. 

a.  Prompt  payment  bonds,  which  guarantee  payment  by 
the  surety  upon  the  failure  of  the  institution  and  involve  no 
waiting  by  the  depositor. 

b.  Deferred  payment  bonds,  which  guarantee  payment  by 
the  surety  of  the  eventual  loss,  which  cannot  be  ascertained 
until  the  affairs  of  the  insolvent  bank  are  finally  adjusted  and 
the  extent  of  salvage  determined. 

Bonds  involving  honesty  and  financial  strength — 1.  Bonds 
for  lost  instruments. — When  stock  certificates,  insurance  poli- 
cies, deeds  and  other  financial  papers  are  lost  or  stolen,  it  is 
common  to  require  a  bond  before  issuing  a  new  document. 
The  bond  indemnifies  the  maker  of  the  instrument  against  the 
consequences  of  the  instrument  reappearing  in  the  hands  of 
some  unscrupulous  person  or  innocent  party.  The  liability  of 
the  surety  depends  partly  upon  the  risk  of  such  a  document  re- 
appearing, partly  upon  the  willingness  of  the  principal  (the 
loser)  to  make  good  any  damages  suffered,  and  partly  upon 
his  financial  ability  to  do  so.  The  bond  sometimes  obligates 
the  principal  and  surety  to  reimburse  the  maker  of  the  instru- 
ment for  the  legal  cost,  expenses  and  counsel  fees  which  may 
be  involved  in  a  defense  of  the  case. 

2.  Internal  Revenue  Bonds. — Manufacturers  of  alcoholic 
liquids  and  tobacco  are  required  to  pay  taxes  to  the  Internal 
Revenue  Department  of  the  Government  and  bonds  are  re- 
quired to  insure  that  such  taxes  will  be  paid.  These  bonds 
will  now  decline  in  importance,  of  course.  They  were  re 
quired  of  distillers,  warehousemen,  brewers,  cigar  manufac- 
turers, tobacco  manufacturers  and  exporters.     Such  bonds  are 


CORPORATE  BONDING  349 

also  required  of  persons  distilling,  warehousing  and  handling 
denatured  alcohol.  The  penalties  imposed  by  law  for  viola- 
tion of  the  regulations  greatly  diminish  the  risk  involved,  as 
they  operate  to  deter  such  persons  from  acting  in  other  than 
a  legal  manner. 

3.  Custom  House  Bonds. — Many  different  varieties  of  cus- 
tom house  bonds  arc  in  use.  Thus,  bonds  are  required  for 
guaranteeing  the  payment  of  import  duties,  guaranteeing  the 
transfer  of  merchandise  to  another  port  for  payment  of  duty, 
guaranteeing  re-exportation  of  certain  commodities,  guaran- 
teeing the  use  of  imported  articles  for  specific  purposes  which 
render  them  free  of  duty,  etc. 

4.  Miscellaneous. — It  is  apparent  that  a  bond  may  be  re- 
quired in  any  case  where  some  guarantee  is  required  that  a 
person  will  fulfil  duties  required  of  him  by  law  or  contract. 
In  addition  to  those  already  mentioned  and  discussed  there 
are,  for  example,  bonds  for  mechanics  liens,  bonds  guarantee- 
ing rent,  bonds  given  for  freight  charges,  bonds  for  the  future 
delivery  of  merchandise,  qualifying  bonds  required  of  insur- 
ance companies,  bonds  of  mortgagors  to  make  improvements 
on  mortgaged  premises,  and  many  others,  too  numerous  to 
mention. 

Factors  in  rate-fixing. — There  are  several  factors  in  cor- 
porate bonding  which  make  underwriting  judgment  more  im- 
portant in  fixing  rates  than  is  true  of  other  forms  of  insurance. 
Bonds  which  involve  honesty,  ability  and  financial  resources 
require  much  the  same  elements  of  judgment  as  do  loans  ex- 
tended by  banks,  and  a  careful  selection  of  risks  is  evidently 
a  very  Important  feature  in  underwriting  success.  A  large 
portion  of  the  premium,  furthermore,  is  really  a  payment  for 
service  rather  than  a  recompense  for  the  assumption  of  risk. 
Loss  ratios  on  corporate  bonds  vary  from  very  low  figures 
on  certain  forms  where  the  principal  deposits  collateral,  to 
high  figures  on  fidelity  risks  where  no  collateral  is  obtained 
and  where  losses  occur  frequently.  In  addition  to  these  fea- 
tures the  term  of  the  contract  is  often  indeterminate,  being 
ended  by  the  happening  of  certain  events,  the  non-payment  of 
premiums  sometimes  does  not  invalidate  the  bond,  and  the 
surety  often  expects  some  indemnification  from  the  principal 
for  any  loss  it  is  called  upon  to  pay. 

It  is  evident  that  the  portions  of  the  premium  which  cover 
losses   and  expenses  will  vary  considerably  among  different 


350    INSURANCE  PRINCIPLES  AND  PRACTICES 

kinds  of  bonds.  In  some,  most  of  the  premium  goes  for 
service;  in  others  a  considerable  portion  is  required  to  cover 
losses.  Often  a  large  part  of  the  services  rendered  by  the 
surety  consists  of  investigations  conducted  before  the  bond  is 
issued.  Under  these  circumstances  it  is  impossible  to  classify 
risks  and  ascertain  rates  for  such  classifications  by  formulae. 
The  insurance  companies  cooperate  in  maintaining  a  central 
bureau  for  promulgating  rates  which  introduces  some  uniform- 
ity as  between  the  different  companies.  These  rates  are  on 
various  bases.  Rates  are  fixed,  for  example,  both  per  unit  of 
exposure  and  per  unit  of  penalty  involved,  and  sometimes 
also  on  the  basis  of  the  price  involved  in  a  contract.  On 
large  schedule  bonds  the  rate  is  reduced  as  the  number  of 
principals  Increases.  Some  rates  are  made  for  one  year,  and 
others  for  the  term  of  the  bond. 

Rates  are  based  upon  experience  insofar  that  the  amounts 
received  must  approximately  equal  disbursements  over  a  pe- 
riod of  years.  But  experience  alone  can  hardly  be  applied  to 
the  rates  for  different  kinds  of  risks,  inasmuch  as  new  types 
of  bonds  are  frequently  Introduced,  statutory  requirements 
compel  variations  In  the  character  of  coverage,  there  Is  no 
standard  for  valuing  deferred  losses,  and  the  element  of  moral 
hazard  is  difficult  to  measure. 


BIBLIOGRAPHY 


SSI 


BIBLIOGRAPHY 

LIFE  INSURANCE 

1.  Dawson,  M.  M.,  "The  Business  of  Life  Insurance,"  New  York,  19n. 

2.  Dawson,  M.  M.,  "Elements  of  Life  Insurance,"  New  York,  1911. 

3.  Zartman,  L.,  "Yale  Insurance  Lectures,"  New  Haven,   1904. 

4.  Zartman,  L.,  "Yale  Readings  in  Insurance,"  New  Haven,  1909. 

5.  Moir,  Henry,  "Life  Assurance  Primer,"  New  York,  1907. 

6.  Willett,  A.  H.,  "Economic  Theory  of  Risk  and  Insurance,"  New  York,  1901. 

7.  Huebner,  S.  S.,  "Life  Insurance,"  New  York,  1915. 

8.  Dunham,  H.  P.,  "Business  of  Insurance,"  New  York,  1912. 

9.  Gephart,  VV.  P.,  "Principles  of  Insurance,"  Vol.  1.,  New  York,  1911. 

to.     American  Academy  of  Political  and  Social  Science,  "Insurance,"  Philadel- 
phia, 1915. 

11.  American   Academy  of   Political    and   Social    Science,   "Modern    Insurance 

Problems,"  Philadelphia,   1917. 

12.  Hudnut,  J.  M.,  "Studies  in  Practical  Life  Insurance,"  New  York,  1911. 

13.  Joyce,  J.  A.,  "Law  of  Insurance,"  San  Francisco,  1919. 

14.  Richards,  George,  "Law  of  Insurance,"  New  York,  1912. 

is.     Fackler,  E.  B.,  "Notes  on  Life  Insurance,"  New  York,  1907. 

[6.     Alexander,  William,  "The  Life  Insurance  Company,"  New  York,  1905 

INDUSTRIAL  LIFE  INSURANCE 

1  Huebner,  S.  S.,  "Life  Insurance,"  New  York,  1915. 

2.  Dryden,  J.  F.,  "Life  Insurance  and  Other  Subjects,"  1909. 

3.  Zartman,  L.,   "Yale  Insurance   Lectures,"   New   Haven,   1904. 

4.  Zartman,  L.,  "Yale  Readings  in  Insurance,"  New  Haven,  1909. 

5.  Henderson,  C.  R.,  "Industrial  Insurance  in  the  United  States,"  1909. 

6.  Hoffman,  F.  L.,  "Industrial  Insurance,"  Annals  of  the  American  Academy 

of  Political  and  Social  Science,  Philadelphia,  September,  1905. 

FRATERNAL  AND  ASSESSMENT  INSURANCE 

1.  Dawson,  M.  M.,  "Assessment  Insurance,"  New  York,  1896. 

2.  Landis,  Abb,   "Analysis  of   Fraternal    Societies,"   Nashville,   Tenn.,    1906. 

3.  Landis,  Abb,  "Life  Insurance  Problems,"  Nashville,  Tenn.,  1910. 

4.  Meyer,  B.  H.,  "Fraternal  Insurance  in  the  United  States,"  Annals  of  the 

American    Academy    of    Political    and    Social    Science,    Philadelphia, 
March,    1901. 

5.  Dawson,   M.  M.,    "Assessment  Life   Insurance,"  Annals   of  the  American 

Academy  of  Political  and  Social  Science,  Philadelphia,  September,  1905. 

6.  Dawson,  M.  M.,  "Fraternal  Life  Insurance,"  Annals  of  the  American  Acad- 

emy of  Political  and  Social  Science,  Philadelphia,  Pa.,  September,  1905. 

7.  Nichols,   W.    S.,   "Fraternal    Insurance    in    the    United    States,"    American 

Academy  of  Political  and  Social  Science,  Philadelphia,  March,  1917. 

8.  Hardy,  C.  S.,  "Fraternal  Insurance  Law,"  Los  Angeles,  1917. 

9.  Huebner,  S.  S.,  "Life  Insurance,"  New  York,  1915. 

GROUP  LIFE  INSURANCE 

1.  Graham,  W.  J.,  "The  Story  of  Group  Insurance."    Address  before  the  Life 

Underwriters'  Association  of  New  York,  N.  Y. 

2.  Graham,   W.  J.,   "Group   Insurance,"   Actuarial   Society   of  America,   Vol. 

XVII,  Part  II,  No.  56,  Oct.,  1916. 

353 


354  BIBLIOGRAPHY 

3.  Morris,  E.  B.,  "Group  Life  Insurance  and  its  Possible  Development,"  Cas- 

ualty Actuarial  and  Statistical  Society  of  America,  Vol.  Ill,  Pt.  2,  No.  8. 

4.  Huebner,  S.  S.,  "Life  Insurance,"  New  York,  1915. 

5.  Day,  W.  A.,  "Group  Insurance,"  Address  before  the  Conference  on  Social 

Insurance,  Washington,  D.  C,  December  5-9,   1916. 

6.  Epsteen,   S.,   "  An  Argument   for   Group  Life   Insurance,"  Address  before 

Scientific  Society  of  the   University  of  Colorado,   March  2,   1914. 

7.  Dunham,  H.  P.,  "Business  of  Insurance,"  New  York,  1912. 

8.  Trousdale,  R.  B.,  "Group  Insurance,"  Annals  of  tlie  American  Academy  of 

Political  and  Social  Scie7ice,  Philadelphia,  March,  1917. 

ACCIDENT  AND  HEALTH  INSURANCE 

1.  Mudgett,  B.  D.,   "Total  Disability  Provision  in  American  Life  Insurance 

Contracts,"  Annals  of  the  American  Academy  of  Political  and  Social* 
Science,  Philadelphia,  May,  1915.     (Supplement). 

2.  Mudgett,  B.  D.,  "Five  Years'  Progress  in  Disability  Protection,"  Annals  of 

the  American  Academy  of  Political  and  Social  Science,  Philadelphia, 
March,  1917. 

3.  Insurance  Institute  of  Hartford,  "Accident  and  Health  Insurance,"  Hart- 

ford, Conn.,  1915. 

4.  Dunham,  H.  P.,  "Business  of  Insurance,"  New  York,  1912. 

5.  Lott,  E.  S.,  "Accident  Insurance,"  Annals  of  the  American  Academy  of  Po- 

litical and  Social  Science,  Philadelphia,  Pa.,  September,  1905. 

6.  Woodward,  A.  P.,  "The  Disability  Insurance' Policy,"  Annals  of  the  Amer- 

ican  Academy   of  Political   and  Social  Science,  Philadelphia,   March, 
1917. 

7.  Flynn,  B.  D.,  "The  Work  of  the  Statistical   Committee  of  the  Bureau  of 

Personal  Accident  and  Health  Underwriters."  Casualty  Actuarial  and 
Statistical  Society  of  America,  Vol.  II.  Part  II,  No.  5,  February,  1916. 

8.  King,  Walter  I.,  "Accident  and  Health  Insurance  from  an  Actuarial  View- 

point," Casualty  Actuarial  and  Statistical  Society  of  America,  Vol.  H, 
Part  I,  No.  4,  October,  1915. 

9.  Woodward,  J.  H.,  "Disability  Benefits  in  Life  Insurance  Policies,"  Casualty 

Actuarial  and  Statistical  Society  of  America,  Vol.  VII,  Part  I,  No.  15, 
November,   1920. 
10.     Craig,  J.  D.,  "Group  Health  Insurance,"  Casualty  Actuarial  and  Statistical 
Society  of  America,  Vol.  VII,  Part  I,  No.  15,  November,  1920. 

LIABILITY  AND   COMPENSATION   INSURANCE 

1.  Blanchard,  R.  H.,  "Liability  and  Compensation  Insurance,"  New  York,  1917. 

2.  Rhodes,  J.  E.,  "Workmen's  Compensation,"  New  York,  1917. 

3.  Rubinow,  I.  M.,  "Social  Insurance,"  New  York,  1913. 

4.  "American  Labor  Legislation  Review,"  Vol.  Ill,   New  York. 

5.  Bradbury,   H.   B.,   "Workmen's   Compensation   and   State   Insurance  Law," 

New  York,  1914. 

6.  Insurance   Institute  of  Hartford,   "Liability  and  Compensation  Lecturers," 

Hartford,  Conn.,   1913. 

7.  Beyer,  D.  S.,  "Industrial  Accident  Prevention,"  Boston,  1916. 

8.  Casualty  Actuarial   and  Statistical   Society  of  America,   Vols.  I-VII,   New 

York. 

9.  Downey,   E.   H.,   "The   Organization   of  Workmen's   Compensation    Insur- 

ance," Journal  of  Political  Economy,  Dec,  1916. 

10.  Annals  of  the  American  Academy  of  Political  and  Social  Science,  "Modern 

Insurance    Problems,"   Philadelphia,    March,    1917. 

11.  Annals  of  the  American  Academy  of  Political  and  Social  Science,  "Insur- 

ance," Philadelphia,  Sept.,  1905. 


BIBLIOGRAPHY  355 

12.  Downey,  E.  H.,  "The  Making  of  Rates  for  Workmen's  Compensation  In- 

surance," Journal  of  Political  Economy,  Chicago,  Dec,  1917. 

13.  International  Association  of  Industrial  Accident  Boards  and  Commissions, 

"Proceedings  of  Annual   Meetings,"   1914-1919. 

14.  National  Workmen's  Compensation  Service  Bureau,  "Report  of  the  Work 

of  the  Augmented   Standing  Committee   on  Workmen's   Compensation 
Insurance  Rates,  1917." 

15.  Dunham,   H.  P.,   "Business  of  Insurance,"   New  York,   1912. 

16.  National  Council  on  Workmen's  Compensation  Insurance,  "Report  on  1920 

Revision   of   Workmen's   Compensation   Insurance   Rates,"   New   York, 
1921. 

17.  Hoodstadt,  Carl,    "Comparison  of  Workmen's  Compensation  Laws  of  the 

United  States  and  Canada,"  U.  S.  Bureau  of  Labor  Statistics,  Bulletin 
No.  275,  Washington,  D.  C,  1920. 

18.  Cornelius,  M.  P.,  "Third  Party  Insurance,"  Louisville,  Ky.,  1920. 

19.  U.  S.  Bureau  of  Labor  Statistics,  Monthly  Labor  Review,  Washington,  D.  C. 

20.  Michelbacher,    G.    F.,    "Manufacturers'    and    Contractors'    Public   Liability 

Insurance,"    Casualty    Actuarial    and    Statistical    Society   of   America, 
Vol.  IV,  Part  I,  No.  9,  November,  1917. 

FIRE  INSURANCE 

1.  Gephart,  W.  F.,  "Principles  of  Insurance,"  VoL  II,  New  York,  1917. 

2.  Huebner,  S.  S.,  "Property  Insurance,"  New  York,  1911. 

3.  Richards,  Geo.,  "  Law  of  Insurance,"  New  York,  1911. 

4.  Deitch,  G.  A.,  "Standard  Fire  Policy,"  Indianapolis,  Ind.,  1909. 

5.  Dean,  A.  F.,  "Analytic  System  for  the  Measurement  of  Relative  Fire  Haz- 

ard," Chicago,  1906. 

6.  Hess,  H.  M.,  "Philosophy  and  Methods  of  the  Analytic  System,"  Chicago, 

1909. 

7.  American  Academy   of  Political   and  Social  Science,  "Insurance,"   Phila- 

delphia, September,   1905. 

8.  Moore,  F.  C,  "Standard  Universal  Schedule  for  Rating  Mercantile  Risks," 

New  York,  1902. 

9.  Zartman,  L.  W.,  "Yale  Lectures  in  Insurance,"  New  Haven,   1904. 

10.  Zartman,  L.  W.,  "Yale  Readings  in  Insurance,"   New   Haven,   1909. 

11.  Dunham,  H.  P.,  "Business  of  Insurance,"  New  York,  1912. 

12.  Joyce,  J.   A.,   "Law  of  Insurance,"   San   Francisco,   1919. 

13.  Riegel,  Robert,  "Ratemaking  Organizations  in  Fire  Insurance,"  American 

Academy  of  Political  and  Social  Science,  Philadelphia,   March,   1917. 

14.  Riegel,    Robert,     "Problems    of    Fire    Insurance    Ratemaking,"    American 

Academy  of  Political  and  Social  Science,  Philadelphia,  March,  1917. 

15.  Riegel,   Robert,    "Fire    Underwriters'   Associations   in    the    United    States," 

New   York,   1916. 

16.  Riegel,  Robert,   "Fire   Insurance  Rates,"  Quarterly  Journal  of  Economics, 

Cambridge,  Mass.,  August,  1916. 

17.  Riegel,  Robert,  "Protection  of  a  Mortgagee's  Interest,"  Journal  of  Political 

Economy,  December,   1915. 

18.  Hardy,  E.  R.  and  Lindner,  W.,  "Insurance  and  Real  Estate,"  New  York, 

1917. 

19.  Richards,  E.   G.,   "The   Experience   Grading   and   Rating  Schedule,"   New 

York,  1915. 

20.  Insurance   Library  Association   of  Boston,  "Lectures  on   Fire  Insurance," 

Boston,   1912. 

21.  Fire  Underwriters'  Association  of  the  Pacific,  "Lectui-es  to  Associate  Mem- 

bers," San  Francisco,  annually. 


2S6  BIBLIOGRAPHY 

22.  Fire    Underwriters'   Association    of   the   Pacific,    "Proceedings    of   Annual 

Meetings." 

23.  Insurance  Institute  of  Hartford,   "Lectures  on   Fire   Insurance,"   Hartford, 

Conn.,  1914. 

24.  Insurance  Institute  of  Hartford,  "Lectures  on  Fire  Insurance,"   Hartford, 

Conn.,  1917. 

USE  AND  OCCUPANCY,  PROFIT  AND  RENT  INSURANCE 

1.  Hamilton  Institute,  "Use  and  Occupancy  Insurance,"  Report  No.  105.  New 

York,   1920. 

2.  Bell,  E.  W.,  "Insurance  against  Loss  of  Profits  Through   Fire."     Address 

before  Insurance  Institute  of  New  South  Wales,  June,  1914. 

3.  Wright,  A.  B.,  "Insurance  of  Loss  of  Profits  by  Fire  or  Consequential  Loss," 

Address  before  Insurance  Institute  of  Liverpool,  Jan.   19,    1920. 

4.  Insurance   Library   Association   of   Boston,   "Lectures   on    Fire   Insurance," 

Boston,  1912. 

5.  Barden,  J.   C,   "Fire   Insurance   and   Allied  Lines,"    The  Eastern    Under- 

nvriter,  January  28  and  Feb.  4,  1921. 

6.  Hooper,  G.  G.,  "Leasehold  Insurance,"  Address  before  the  Insurance  So- 

ciety of  New  York,  January,  1920. 

7.  Levy,  Leo,  "Use  and  Occupancy  Insurance,"  Address  before  the  Insurance 

Society  of  New  York,  Jan.  30,   1917. 

MARINE  INSURANCE 

1.  DeHart,  E.  L.  and  Simey,  R.  I.,  "Arnould's  Law  of  Marine  Insurance," 

London,   1915. 

2.  Eldridge,  W.  H.,  "Marine  Policies,"  London,  1907. 

3.  M'Arthur,   Charles,   "Contract  of   Marine   Insurance,"  London,    1890. 

4.  Templeman,  F.,  "Marine  Insurance,"  London,   1918. 

5.  Tyser,  C.  R.,  "Law  Relating  to  Marine  Insurance  Losses,"  London,  1894. 

6.  Gow,   William,   "Handbook   of   Marine    Insurance,"   London,    1913. 

7.  Gow,  William,  "Sea  Insurance,"  London,   1914. 

8.  Lazarus,  G.  M.,  "Law  Relating  to  Insurance  of  Freight,"  London,  1915. 

9.  Congdon,  E.  W.,  "General  Average,"  New  York,  1913. 

10.  Winter,  W.  D.,  "Marine  Insurance,"  New  York,  1919. 

11.  Huebner,  S.  S.,  "Marine  Insurance,"  New  York,  1920. 

12.  Huebner,   S.  S.,   "Legislative  Obstructions  to  the   Development  of  Marine 

Insurance,"   Govt.   Printing  Office,   Washington,   D.   C,    1920. 
Z3.     Huebner,  S.  S.,  "Report  on  Status  of  Marine  Insurance,"  Government  Print- 
ing Office,  Washington,  D.  C,   1920. 

14.  Subcommittee  on  the  Merchant  Marine  and  Fisheries,  House  of  Representa- 

tives, "Hearings  on  Marine  Insurance,"  Government  Printing  Office, 
Washington,   D.  C,   1920. 

15.  Richards,  Geo.,  "Law  of  Insurance,"  New  York,  1912. 

16.  Rush,  Benjamin,  "The  Marine  Cargo  Form,"  Address  before  Fire  Insur- 

ance   Society   of   Philadelphia,   Philadelphia,    1916. 

17.  Rush,  Benjamin,   "Marine    (Hull)    Insurance,"  Address  before  the  Insur- 

ance Society  of  New  York,   New   York,   1918. 

AUTOMOBILE  INSURANCE 

1.  Riegel,  Robert,  "Automobile  Insurance,"  Motor  Age,  Chicago,  March  23, 

30,  April  6,  1916. 

2.  Riegel,  Robert,  "Automobile  Insurance  Rates,"  Journal  of  Political  Econ- 

omy, Chicago,  June,  1917. 


BIBLIOGRAPHY  3S1 

3.  Michelbacher,  G.  F.,  "Casualty  Insurance  for  Automobile   Owners,"  Cas- 

ualty Actuarial   and   Statistical   Society  of  America,  Vol.   V,   Part  II, 
No.   12,  May,   1919. 

4.  Ryder,  A.,  "Principles  of  Automobile  Ratemaking,"  Address  before  Insur- 

ance Society  of  New  York,  December  9  and  16,   1919. 

5.  Reynolds,   Ralph,    "Automobile    Insurance,"   Address   before   the    Fire    Un- 

derwriters'   Association    of    the    Pacific,    San    Francisco,    February    4 
and   5,    1919. 

6.  Small,  A.  R.,  "The  Schedule  Method  for  Automobile  Classification,"  Ad- 

dress  before    the    Fire    Underwriters'    Association    of    the    Northwest, 
Chicago,  October  6  and  7,  1920. 

7.  Dunham,   H.   P.,   "The  Business  of  Insurance,"   New  York,   1912. 

8.  Cornelius,  M.  P.,  "Third  Party  Insurance,"  Louisville,  Ky.,  1920. 

TITLE  INSURANCE 

1.  Huebner,  S.  S.,  "Property  Ins-irance,"  New  York,  1911. 

2.  Dunham,  H.  P.,  "Business  of  Insurance,"  New  York,   1912. 

3.  Elliott,  C.  B.,  "Law  of  Insurance,"   Indianapolis,   Ind.,    1907. 

4.  American   Association   of  Title   Men,   "Annual   Proceedings." 

5.  Niblack,   W.   C,   "Abstracters   of   Title    Insurance,"    Chicago,    1908. 

CORPORATE  BONDING 

1.  Blanchard,  R.  H.  and  Moore,  G.  D.,  "Corporate  Bonding,"  Casualty  Act- 

uarial  and   Statistical    Society   of  America,   Vol.   VII,   Part   I,   No.    15, 
November,    1920. 

2.  Mackall,  L.  E.,  "Principles  of  Surety  Underwriting,"  Baltimore,  1914. 

3.  Penniman,   H.   G.,  "Manual   of  Fidelity  Insurance   and  Corporate  Surety- 

ship," New  York,  1911. 

4.  Huebner,  S.  S.,  "Property  Insurance,"  New  York,   1911. 

5.  Towner,  R.  H.,  "Surety  Rates,"  Address  before  the  Annual  Convention  of 

the  South  Carolina   Underwriters'  Association,  May  20,  1915. 

6.  Towner,  R.  H.,  "Contract  Bonds,"  Address  before  the  Annual  Convention 

of  the  National   Association  of  Casualty  and  Surety  Agents,  Detroit, 
August  27,  1916. 

7.  Elliott,  C.  B.,   "Law  of  Insurance,"  Indianapolis,  Ind.,   1907. 

8.  Frost,  T.  G.,  "Treatise  on  Guarantee  Insurance  and  Suretyship,"  Boston, 

1909. 

9.  Zartman,  L.   VV.,   "Yale  Insurance   Lectures,"   New   Haven,   1904. 
10.     Walker,   M.  B.,  "Law  of  Fidelty  Bonds,"  Baltimore,   1909. 

CREDIT  INSURANCE 

1.  Dunham,  H.  P.,  "Business  of  Insurance,"  New  York,  1912. 

2.  American   Credit   Indemnity   Co.,   "Collateral   on   Merchandise   Accounts," 

American  Credit  Indemnity  Co.,  New  York,   1911. 

3.  American  Cerdit  Indemnity  Co.,  "Credit  Insurance  Explained,"  American 

Credit  Indemnity  Co.,  New  York,   1911. 

4.  Prendergast,  W.  A.,  "Credit  and  its  Uses,"  New  York,  1906. 

5.  Ettinger,  R.  P.  and  Golieb,  D.  E.,  "Credits  and  Collections,"  New  York, 

1917. 

6.  Irving,  R.  A.,  "Credit  Insurance,"  London  Accident  and  Guarantee  Com- 

pany, Philadelphia,  May,  1911. 

7.  London  Accident  and  Guarantee  Company.    Various  pamphlets  issued  from 

time  to  time  by  the  company. 

8.  American  Credit  Indemnity  Company.    Various  pamphlets  issued  from  time 

to  time  by  the  company. 


APPENDICES 


3S9 


APPENDIX 


APPLICATION  FOR  LIFE  INSURANCE— PART  I 


:! 


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361 


362    INSURANCE  PRINCIPLES  AND  PRACTICES 


I — Continued 


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APPENDIX 


363 


U 

APPLICATION  FOR  LIFE  INSURANCE— PART  II 


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364    INSURANCE  PRINCIPLES  AND  PRACTICES 


II — Continued 


41  Ri    C!    a!    Ill    »k 


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Z6S 


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366    INSURANCE  PRINCIPLES  AND  PRACTICES 


II — Continued 


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APPENDIX 


367 


III 


ENDOWMENT  LIFE  INSURANCE  POLICY 

THE 

Insurance  Company 


AaroviiT 


l^pjtjmtn 


.:i.Q.0.Q.O.. 


|^l>  ^\%  €mUmt  of  ingurame  agrees;  to  ^p 


flmoimt  of 


JimtMaxif 
35 

illBtUTitpM 

enMttmttrt 


Heta  ^fotlit 


Ktcn  {>a;a&I^ 


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-BoUarsf 


Wiete  flafi 

JDott  Cfftci 


Jtuontcstobilitp 


at  (fte  Home  Office  of  the  Company  in  Hartford,  Connecticut,  to 

iaftpBot,  _  J?®.!'?.... 

of  the  Insured,  immediately  oa  receipt  of  due  proofs  of  the  death  of 


5obn  J3oe 


the  Insured, 

...CDnnettituL 


of. JwrtforlJ , Coonty  of ...^Sar.Korb state  of. 

rfurfnt  the  continuance  of  this  contract  and  before  its  tnaturityas  an  endowment. 

TTw  iHscred,  ff  HWng  ort  the. Jf.'M rfay  of. ..._...  Jftbruari' 19.39. 

fnA,  d  the  premiums  required  under  this  contract  shall  have  been  paid,  shall  receive  the  amount  of  this 
iftducance. 

■ftj&  ccwrttact  b  Issned  in  consJderatJbn  of  the  signed  application  tor  this  tasnrance  w;W:h  is  mad'*  a  {nrt 
b^rasf  4rttf  <Opy  of  «hich  rj  attached  herrto.  and  of  tlie  premttna  of  /f^   rS^ 

^  $O^J^^P^^,tpE\Dtnt^:tijii)t _....    ::ysp.9^WH?P.._„_ ..Dollars, 

payable.. .' .?l?"l?.?l.'.? Jrt.jSxaiarttf?Co«  recerpt  signed  by  the  Ptesfrfsn* 

or  a  Secretary  and  countersigned  by  an  autj^ized^aa^XolNj^e  Company. 

(The  annual  premium,  incfuefes  a  premium  flf  $ ^i^^.9.....to  provide  for  permanent  total  disability 

Eenefit*  as  sot  iatih  on  the  third  page  hera 

The.  first  »uch  payment  sriafl  heLin^ph^lhe  delivery  oi  this  contract,  amd  a  like  paymeftt  on  or  before 


the.. 


.   - St^t^MP. 


in  each  year^nril  toh 
mrtil  thfi_p|Sor  tiV^ttv 


n^for ^P>f^^^ full'  years  shall  have  Ibeen  paid  of 

f  the  Insured,  bat  no  such  payment  wflf  be  required  during  permanent  totaf 
eipt  by  the  Company  of  due  proof  thereof 
?hall  be  paid  in  advance  at  fR«  Hoiwc  Olfifce  <*^  ten  an  authorized  agent  of  the  Company. 

msurance  shall  be  effective  frorai.. .„  jFebCUarp.tfit 19.19.     The   Insurance  Years, 

anir'all  subsequent  provisions  for  Caih'  Loans,  Cash  Vaiucs,  Paid-up  and  Aotomatic  Term  Insurance 
are  computed  from  that  date. 

This  contract  shall  be  incontestable  after  one  year  Itosn  date  of  issue,  except  for  non-payment  of  pre- 
miums.    It  is  free  from  conditions  as  to  residence,  occopation,  travel  or  place  of  death,  rncludmg  mili- 
tary or  naval  service  unlcsssuch  serviceshall  be  restrtcted  by  indorsement  hereon  at  the  time  of  issuance 
ofl  the  contract. 
This  contract  is  subject  to  the  privileges  and  conditions  recited  on  the  subsequent  pages  hereof. 

Iitn;£S  tSS^rtof  THE  aNSURANCE- company  has  caused  this  mstrunwnTta  be  «igocd  by  Ms 

President  and  a  Secretary,  at  .  ,1 '     *     "       ■    *      .^his.. .,  -.  .^^^^^.-,.,.^'?.^."- _„. — 

day  of. Jftbruarj I9...V9.., 


f^tti 


titntn^       ^_^ .  ''^'^ 

Vefarimtia  Sccritary. 
_2P__YEAR  ENDOWMENT.    PREMIUMS  PAYABLE  FOR      20    VEAftS.    NOW-PAHTrCWATlKIO. 
IN  EVENT  OF  PERMANENT  TOTAL  DISABILITY  PREMIUMS  WAIVED  ANO  MONTHLY  INCOME  PAiYAfllE  WrTHOOT 

DEDUCTION  FROM  INSORArNCE. 


368    INSURANCE  PRINCIPLES  AND  PRACTICES 


III — Continued 


Options  at  ^latavitp 


The  Insured  if  living  at  the  maturity  ot  this  contract  as  an  endowment  may  select  in  lieu  o(  the  endowment  tlien  payable,  one  ol  tilt 
following  options: 

1.  Receive  a  cash  payment  ot  %....^.S.l4^oa and  a  paid-up  contract  payablK  at  death  for  $.._f.0,0C(J-0fl ._.. 

2.  Receive  a  paid-up  contract  payable  at  death  for  S.'..- £5^Jo*DjQ 

3.  Receive  an  annual  income  o(  i jglL4.0 payable  during  the  natural  lite  of  the  Insured,  first  payment  at  maturity. 

Options  1  and  J  are  tonditiooed  upon  evidence  of  insurability  satisfactory  to  the  Company. 

Special  ^iMXm^ 

Ca£^  Haantf — On  demand  m  writing  to  the  Hom^  Office  of  tlie  Company,  after  two  full  years'  premiums  shall  have  been  paid,  the  Insured 
may  borrow  at  any  time  during  the  year  on  the  sole  security  of  this  contract  art  amount  not  exceeding  the  cash  value  at  the  end  of  the  current 
insurance  year  as  specified  in  the  table  of  cash  values  hereinafter  set  forth,  provided:  interest  in  :\dvanceat  the  rate  of  five  and  one-half  ptt- centum 
per  annum  shall  be  payable  and  the  initial  interest  shall  be  deducted  from  the  loan;  the  contract  shall  be  a-^igned  to  the  Company  by  all  of  the 
parties  in  interest  thereunder;  the  premiums  shall  be  fully  paid  to  the  end  of  the  current  insurance  year,  or  if  not  already  so  paid  shall  be  deducted 
in.the  adjustment  of  the  loan;  the  amount  available  at  a:iy  time  shall  include  any  previous  loan  ihei*.  unpaid.  Loans  other  than  to  pay  premiums 
CM  jjifc  contracts  in  this  Company  may  be  deferred  for  not  exceeding  sixty  days  after  the  application  therefor  is  made.  If  the  total  indebtedness 
shall  equal  or  exceed  the  cash  value  at  the  time  of  failure  to  repay  any  such  loan  or  to  pay  interest  when  due,  such  failure  shall  render  this  coptract 
null  and  void  at  the  expiration  of  one  month  after  due  notice  shall  have  been  mailed  by  the  Company  to  the  last  known  address  of  the  person 
to  whom  the  loan  shall  have  been  made  and  of  the  Insured,  or  assignee,  if  any. 

^CflCC  (n  ^Ispmotl  of  ^cmiumg.— a  grace  of  thirty-one  days  during  which  the  contract  will  remain  in  full  force  will  be  allowed  in  the 
payment  of  all  premiums  except  the  first.  If  death  shall  occur  within  the  grace  period  the  unpaid  premium,  if  any,  for  the  then  current  insurance  year 
will  be  deducted  from  the  amount  payable  hereunder. 

JBUfnfitalcment  ot  Contratt.— In  case  of  default  in  the  payment  of  any  premium  or  interest  the  Company  will  reinstate  tKe  contract  at 
ftny  time,  if  not  previously  surrendered  for  its  cash  value,  upon  written  application  by  the  Insured  to  the  Company  at  its  Home  Office  with 
evidence  of  insurability  satisfactory  to  the  Company,  paymer.t  of  all  premiums  that  would  have  been  paid  in  the  intervening  time  if  no  default 
had  been  made,  with  interest  thereon  at  llie  rate  of  five  and  one-half  p)cr  centum  per  annum  computed  from  the  premium  due  date,  and  payment 
or  reinstatement,  with  interest  a'  like  rate,  of  any  indebtedness  existing  at  the  time  of  default. 

Cfjangt  0(  JSfneficiarp.-  flsattctfa  on.— Provided  this  contract  is  not  assigned,  the  Insured  may  at  any  time  and  frtjm  time  to  tima 
during  its  continuance  change  th*  Beneficiary,  to  take  effect  only  when  such  change  and  the  written  consent  of  the  Company  thereto  are  indorsed 
upon  the  contract  at  the  Home  Wee  of  the  Company,  or  attached  thereto,  whereupon  all  rights  of  the  former  Beneficiary  shall  cease.  If  the 
Insured  shall  survive  the  Beneficiary  or  Beneficiaries  or  any  of  them  named  herein,  the  proceeds  of  the  contract  or  the  share  of  the  deceased  Bene- 
ficiary or  Beneficiaries,  as  the  case  may  be,  shall  be  paid  to  the  executors,  administrators  or  assigns  of  the  Insured,  unless  otherwise  provided  ia 
or  by  indorsement  upon  this  contract. 

instalment  <£)pt(on,— The  proceeds  of  this  contract,  if  not  less  than  SI  ,000,  may.be  placed  in  trust  with  the  Company  to  pay  to  the  Bene* 
ficiary  from  the  time  when  such  proceeds  are  payable,  an  annual  income  limited  to  a  period  ol  years,  or  an  annual  life  income,  according  tO-tho 
accompanying  tables.    The  Insured  if  living  at  the  maturity  of  the  contract  as  an  endowment  may  exercise  the  same  option. 


CtnitteJl  3nxiUI».— AMY  ONE  OF  THE  NUMBER  OF  INCOMES  MAY  BE  SELECTED. 

Number  or  Annual  Incoues 

i 

6 

7 

8 

9 

10 

11 

12 

13 

14 

IS 

16      17      13 

19 

20 

21 

22 

23 

24 

25 

26 

27^ 

28 

29 

30 

AuouKT  CF  Each  Annual  Incobu 

PER  $1,000 

»2H 

1 

5,3, 

S,5S 

S!40 

$127 

$1,6 

$107 

$100 

$94 

$S8 

$84 

$S0   $76    $73 

$70 

$68 

$65 

$63 

$61 

$60 

$58   $57 

$55 

$54 

$53 

$51 

AnintnJ  ttaem*  tax  Slfr.— mcOME 

HOV/EVER,  TO  BE  PAID  FOR  NUMBER  OF  YEARS  STATED  IN  CASE  OF  PRIOR  DEATH. 

WlHIMuy  NvuBEit  OF  Pavmbnts                                                                                  20                                                        1        18       1            17 

,4           1            IS 

AcB  Attained  When  Proceeds  are  Pava&lb 

16 

S44 

17 

TO 

21 

22 

TO 

24 

25 

TO 

27 

S47 

28 

TO 

30 

$4S 

31 

AND 
32 

S^9 

33 

ANO 

34_ 

$50 

35 

AUB 

36 
^^1 

37 

AND 

38 

5S? 

39 

ASD 
40 

41 

AND 

42 

43     44     4S     46 

=55    $>6  1  SS7  1  SSS 

47 

SS9 

43 

«ftn 

49 

S6I 

50 
"si 

$63 

52 

«A4 

53 

54 

867 

Si 

MiNiuuM  Number  or  eAVMSNTs 

■U 

tT 

12            1            11 

1             ,0            i                  9 

?=• 

AOE  ATT.UNBD  WnSN  PaOCIEDS  ARE  PAVA.bLB    |    ^7        5^        59 

00 

S7<1 

62  1  63  ]  64J  6j 

06  1  67  1  68  1  69 

jnj  7, 

Si02|s,04 

72  1    73  1    74  1    75  1   76  1    77   1    78 

79   80:7, 

Akountop  Each  Annual  PAYMENt  PE![$l,000l  572    $7J    S7S 

s:7 

JSO 

S.'-.4 

Ss5 

s»i_ 

S91 

S9J 

i'.sUioi) 

8,12 

$l,J 

s,is 

s,,; 

SI2; 

S,JalSI32 

$145$, 4S 

tSraSt  ^unb  (Option. — The  proceeds  of  this  contract  may  similarly  be  placed  in  trust  with  the  Company,  to  pay  to  the  Beneficiary, 
during  the  continuance  of  the  trust,  interest  on  such  proceeds  at  the  rate  of  three  and  one-half  per  centum  per  annum,  such  proceeds  to  be  returned 
at  the  termination  of  tlic  trust,  or  to  be  paid  to  the  execut  >rs,  administrators  or  assirns  of  the  Beneficiary  in  event  of  death  prior  to  such  termina* 
tion.    The  Insured  if  living  at  the  maturity  of  the  contract  as  an  endowment  may  exercise  the  same  option. 


If  any  premium  shall  not  be  pSid  on  or  before  the  date  when  due,  and^  if 
there  shall  be  no  indebtedness  to  the  Company,  the  insurance  will  automati- 
cally continue  from  eaid  due  date  as  term  insurance  during  the  term,  including 
the  period  of  grace,  specified  in  column  3  of  the  accompanying  ta  le  and  the 
amount  of  cash  specified  in  column  4,  if  any,  will  be  paid  as  a  pare  endow- 
ment at  the  end  of  the  period,  if  the  Insured  is  then  living;  or  in  lieu 
thereof,  upon  written  request  made  by  the  Insured  within  three  months 
from  said  due  date  and  surrender  of  the  contract  the  Company  will,  as  the 
Insured  may  elect,  either  issue  a  contract  for  the  amount  of  paid-up  insurance, 
J(  any.  specified  in  column  2,  or  pay  the  cash  value,  if  any,  specificd'in  column  I. 

If  there  shall  be  an  indebtedn^  to  the  Company,  and  if  any  premium 
shall  not  be  paid  on  or  before  the  date  when  due,  an  amount  of  insurance, 
equal  to  the  face  amount  of  this  contract  less  the  indebtedness,  will  auto- 
matically continue  from  said  du5  date  as  term  insurance,  for  the  term,  including 
the  period  of  grace,  but  not  extending  beyond  the  endowment  period  which 
the  exce<s  of  the  cash  value  of  the  contract,  if  any,  over  the  indebtedness 
will  purchase  at  the  then  age  of  the  Insured,  at  the  single  premium  rates 
according  to  the  American  Experience  Table  of  Mortality,  with  3  J  per  centum 
interest.  Should  such  excess  be  more  than  sufficient  to  purchase  term  insur- 
ance to  the  end  of  the  endowment  period,  the  amount  remaining  will  be 
applied  to  the  purchase  of  a  pure^ endowment,  payable  to  the  Insured,  if 
living,  at  the  end  of  the  endowment  period.  In  lieu  thereof,  upop  written  re- 
quest made  by  the  Insured  within  three  months  from  -said  due  date  and 
surrender  of  the  contract,  the  Company  will,  as  the  InsurecJ  may  elect, 
either  issue  a  contract  for  the  amount  of  paid-up  endowment  insurance  which 
said  excess  will  purchase  at  the  then  age  of  the  Insured,  oa  the  mortalify 
and  interest  basis  heretofore  d^ignated,  or  pay  said  excess  irt  cash. 

Payment  of  any  cash  value  may  be  deferred  for  not  txcecding  sixty  days 
flfter  the  application  therefor  is  made. 

The  term  insurance  and  the  paid-up  insurance  specified  above  may  be 
Burrfndercd  for  caeli  and  palJ-up  inburancc  shall  be  subject  to  cash  loans. 

If  the  premiums  on  this  contract  shall  be  paid  semi-annually  or  quarterly, 
due  allowance  will  be  made  in  computing  benefits  by  the  above  table  for 
that  portion  of  the  year's  premium  paid  over  and  above  the  full  number  of 
years!  premiums  indicated. 


Cast)  anti  Xoan  Values,  ^aib-up  anb  Sutomalfc  "Ztxm  Snsacan^e. 


The  valg«i  hprclrj  ipecifiwJ  are  ba»«l  upon  ihf  Ai 
I  l-J%  ip!cr*s-.  \ni  a/eil  leajt  foual  to  «h<  entire  I 
fun  I  1-1%  oJ  the  amount  Insured  hereby  and  sue) 
if  ihe  nei  level  premium  n\eihcML  The  Cuh  Vali 
coiTtitondlDE  auiooMtic  opUooa.  ,  m 

AC8   JJ- 

Tm«  VALUVS  STATro  W  COU-MMS  I.  I  AND  4  AVAIVABLS  tM  MTt  Vt*»t  ivttt  M t£IL 


n  Experience  T»l»le  o(  Mortallly  wilh 
gal  reMrve  on  thii  coninci  lets  not  mor« 
reserve  li  compuled  upon  the  ume  Ubt* 
:•  ore  ftt  leut  *<jual  tD  lh<  vtluei  o<  tbe 


HB    rCLLOWIN 


1  Year 

2  V™. 

3  " 

4  ■■ 

5  '• 
0  " 

7  " 

8  " 

9  •• 

10  " 

11  " 
I?  ■■ 

13  •' 

14  •' 

15  •■ 

16  •• 

17  •• 

18  " 

19  " 
30  •' 
2S  '• 
30  •• 


t N(ir.t___ 

S _42.0fi_. 

J_...,£r.lD.... 

s.._..iia..:Q.... 


1 ,Koa& 

»-..._.iO0L. 


5 _1SQ... 

$ 20Q.. 

$__251_ 


$ i9a.6J. 

}  .....as.  Ji, 

5 2aZJ6, 

$.....J27..S7., 

5 ^7ft  10 

$ 42Z.J& 

$_.,.4ai.id.... 

$ SJSa?* 

$..-.,595.72,.... 
<      (iM.lO 

$ 72S.Q7.... 

3 788a89 

$ 855..81.... 

» «6.07..- 

t   1000  no 


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$ — 

S 


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67a._. 

$. 732__. 


830 

S..„_..874._.. 

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$,. .«s>. 

% 


C<M.UMN   > 
YUaS       DATS 

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...9.._.  322. 
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IS =_ 


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ftp  II 


-139.14.- 
,.216.72_ 

$._...292.02.. 

S,._36S.37.,. 


-i06_3i- 
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S....639J9_ 
$.-_7Q3.79._ 
<  76'i  07 
$....817.49... 
i_&i6.54_. 
$.._.913.J1.. 
S..Ji7.23_ 


*Pa/ftb(e  at  the  am]  ol  eniowmvitt  period  oc  iirior  ileub  d  tha  Imw 
WMI4  VALUCS  AVAILABU  DURING  CONTtACT  VBAIL 


CNBOWMCttT. 


APPENDIX 

III — Continued 


369 


Settlement  in  Cbent  of  permanent  tlTotal  i^i^afiilitp 

After  one  full  annu^il  premium  stiall  have  been  paid  upon  this  contract  and  before  a  default  in  the  payment  of  any  lubsequent  premjum, 
if  the  leisured  shall  furnish  the  Company  with  due  proof  that  he  has  since  such  payment,  prior  to  the  maturity  of  the  endowment  and  before 
having  attained  the  age  of  60.  become  wholly  disabled  by  bodily  injuries  or  disease,  and  will  be  permanently,  continuously  and  wholly  prevented 
thereby  for  life  from  engaging  in  any  occupation  or  employment  for  wage  or  proht.  the  Company  will  waive  the  payment  of  any  future  premiums 
which  may  fall  due  on  this  contract  during  vich  disabihty.  and  the  premiums  so  waived  will  not  be  deducted  in  any  settlement  o(  the  contract. 
Beginning  six  months  after  receipt  of  due  proof  of  permanent  total  disability  sustained  as  aforesaid  the  Company  will  pay  to  the  Insured  each 
month. so  long  as  he  shall  live  and  suffer  such  disability, an  amount  equal  to  SlOfor  each  $1,000  of  insurance  stated  on  the  first  page  hereof. 
such  payments  to  be  io  addition  to  all  other  benefits  hereunder  provided.  The  Insured  shall  not  have  the  right  to  commute  such  monthly  in- 
stalment payments 

If  the  Insured  shall  furnish  proof  of  like  disabihty  occurring  after  he  shall  have  attained  the  age  of  60,  the  Company  will  allow  all  premiums 
falling  due  after  rtjccipt  of  such  proof,  so  long  as  he  shall  suffer  such  disability,  to  accumulate  without  interest  as  an  indebtedness  on  this  coo- 
tract  and  the  values  in  the  table  on  page  2  shall  increase  in  the  same  manner  as  if  the  premiums  were  being  paid  by  the  Insured. 

In  addition  to  or  independently  of  all  other  causes  of  permanent  total  disability  the  Company  will  consider  the  entire  and  irrecoverable  loss 
of  the  sight  of  both  eyes,  or  of  use  of  both  hinds,  or  of  both  feet,  or  of  one  hand  and  one  foot,  as  permanent  total  disability  within  the  meaning 
of  this  provision 

Upon  written  request  signed  by  the  Insured  and  upon  return  of  this  contract  to  the  Company  for  proper  indorsement,  the  Company  will 
annul  this  provision  and  thereafter  the  annual  premium  shall  be  reduced  by  the  amount  charged  tor  this  benefit  as  stipulated  on  the  first  page 
hereof.  In  any  event  any  annual  premium  payable  after  the  Insnred  shall  have  attained  the  age  of  sixty  years  shall  be  reduced  by  the  amount 
charged  for  this  benefit 

(general  Conbitionfi 

iJIoMfitattonfl,  ett.— No  agent  can  make,  alter  or  discharge  this  contract  or  extend  the  time  for  payment  of  premiums,  nor  can  this  contract 
t«  varied  or  altered  or  its  conditions  waived  or  extended  in  any  respect,  except  by  the  written  agreement  of  the  Company,  in  compliance  with 
the  law  of  the  sute  in  which  the  contract  is  issued,  signed  by  the  President,  or  one  of  the  Vice-Presidents  or  Secretaries,  whose  authority  will  not 
be  delegated. 

itliSBlatemmt  ot  Sse. — If  the  age  of  the  Insured  was  incorrectly  stated  in  the  application  for  this  contract,  the  amount  payable  hereunder 
diall  be  the  insurance  which  the  actual  premium  paid  would  have  purchased  at  the  true  age  of  the  Insured.  Age  will  be  admitted  on  satisfactory 
proof. 

.^an-lpapnicnt  o(  PtemfumS.— If  any  premium  shall  not  be  paid  on  or  before  thedate  when  due  the  liability  of  the  Company  sbalJ  be  only 
SS  hereinbefore  provided. 

9SB<511inml. — No  assignment  hereof  shall  be  binding  upon  the  Company  unless  made  by  an  instrument  in  writing  indorsed  upon  this  con-^ 
tract  or  attached  hereto,  nor  unless  a  duplicate  shall  be  furnished  to  the  Company  forthwith  upon  its  execution.  The  Company  shall  not  be  held 
responsible  for  the  validity  of  any  such  assignment    Any  claim  made  under  an  assignment  shall  be  subject  to  proof  of  interest  and  extent  thereof. 

HInttbtCllnctid. — ^Any  indebtedness  to  the  Company  on  account  of  this  contract  will  be  deducted  in  any  settlement  hereunder.  Any  part 
Ol  the  premium  for  the  insurance  year  remaining  unpaid  at  the  death  of  the  Insured  shall  be  considered  an  indebtedness  to  the  Company  hereunder. 

^ulciTie In  case  of  suicide  committed  while  sane  or  insane  within  one  year  from  the  date  on  which  this  insurance  shall  become  effective 

Gl6  limit  of  recovery  hereunder  shall  be  the  premiums  paid 

Ctttire  Conlrart.— This  instrumenmnd  the  application  constitnte  the  endrtf  contract  between  the  parties  hereto,  and  all  statements 
purporting  to  be  made  by  the  Insured  shall  in  the  ab^nce  of  fraud  be  deemed  representations  and  not  warranties  and  no  such  statement  shall 
a\'oid  the  contract  or  be  used  in  defence  to  a  claim  under  the  contract  unless  it  be  contained  in  the  application  herefor  and  a  copy  of  such  applica- 
Gfis  u  3S{as:h£slj!£!Jto- 


370    INSURANCE  PRINCIPLES  AND  PRACTICES 

IV 
DISABILITY  CLAUSE 

If  after  one  full  year's  premium  has  been  paid  in  cash  and  while  this  policy 
is  still  in  full  force  without  default  and  not  as  paid-up  or  extended  insurance 
under  the  non-forfeiture  provisions  and  before  the  anniversary  date  of  the 
policy  nearest  the  Insured's  attained  age  of  60  years  the  Company  receives  at 
its  Home  Office  due  proof,  in  such  form  as  it  may  require,  that  the  Insured  has 
became  totally  and  permanently  disabled  as  hereinafter  denned,  the  Company 
will,  without  further  apportionment  of  surplus  to  this  policy  and  without  de- 
duction from  the  face  of  the  policy  at  death  of  maturity  and  without  affecting 
the  cash  and  other  values. 

Pay  to  the  Insured  ten  dollars  per  month  per  $1,000  of  insurance,  said 
monthly  payments  beginning  six  months  after  the  receipt  of  such  proof  and 
terminating  with  the  last  payment  preceding  the  maturity  of  or  settlement  under 
this  policy  whether  by  the  death  of  the  Insured  or  otherwise ;  or  such  monthly 
payments  shall  terminate  with  the  last  payment  preceding  cessation  of  such  dis- 
ability if  that  is  prior  to  such  maturity  or  settlement;  and  will  also, 

2.  Pay  the  premiums  under  this  policy  as  they  become  due  during  the  life  or 
disability  of  the  Insured,  beginning  with  the  premium  due  on  the  anniversary 
date  of  this  policy  next  succeeding  the  receipt  of  such  proof. 

Total  and  permanent  disability  hereunder  is  defined  to  be: 

(a)  The  entire  and  irrecoverable  loss  of  the  sight  of  both  eyes,  or  the  sever- 
ance of  both  hands  at  or  above  the  wrists,  or  of  both  feet  at  or  above  the  ankles, 
or  of  one  entire  hand  and  one  entire  foot;  or 

(b)  The  total  and  permanent  inability  through  bodily  injury  or  bodily  or 
mental  disease  on  the  part  of  the  Insured  then  and  at  any  time  thereafter  to 
earn  or  obtain  any  wages,  compensation  or  profit  at  any  kind  of  work,  occupation, 
business  or  profession. 

Interest  due  on  any  outstanding  indebtedness  while  this  policy  is  in  force  by 
virtue  of  the  disabilit}'  provision  shall  be  paid  to  the  Company  in  cash  or,  if 
not  so  paid,  shall  be  deducted  from  the  monthly  payments.  All  indebtedness  on 
this  policy  shall  be  deducted  in  the  settlement  at  maturity  whether  by  the  death 
of  the  Insured  or  otherwise. 

Prior  to  and  after  having  approved  proof  of  the  disability  the  Company  may 
from  time  to  time,  but  not  oftener  than  once  a  year,  demand  proof  of  the  exist- 
ence and  continuance  of  such  disability  and  a  physical  examination  of  the  Insured 
by  an  examiner  appointed  by  the  Company;  and  upon  failure  of  the  Insured  to 
furnish  such  proof  or  to  permit  such  physical  examination  to  be  made,  or 
upon  the  Company  being  satisfied  that  the  disability  as  above  defined  does  not 
exist,  the  monthly  payments  and  payment  of  premiums  by  the  Company  shall 
cease  and  determine  and  premium  payments  by  the  Insured  under  this  policy 
shall  be  resumed.  If  thereafter  the  premium  payments  are  not  so  resumed  the 
liability  of  the  Company  under  this  policy  shall  cease  and  determine  unless 
otherwise  provided  in  this  policy. 

The  liability  of  the  Company  under  this  disability  clause  shall  terminate: 

(a)  If  the  extra  premium  for  the  disability  benefits  is  not  paid  in  accordance 
with  the  terms  of  this  policy;  or 

(b)  If  this  clause  shall  have  been  cancelled  in  writing  by  the  Insured;  or 
(f)   If  the  Insured  shall  voluntarily  or  involuntarily  engage  in  military  or 

naval  service  in  time  of  war,  or  in  any  ambulance,  hospital  or  relief  service  in 
a  civilian  capacity  involving  actual  field  service. 
This  disability  benefit  is  given  in  consideration  of  the  application  therefor 

and  of  the  payment  of  an  additional   annual   premium  of  $ ,  which 

amount  is  included  in  the  premium  stated  on  the  first  page  of  this  policy.     Said 


APPENDIX  371 

IV — Continued 

additional  premium  shall  be  paid  with  the  premium  otherwise  required  under 
this  policy  and  for  the  same  period  or  until  the  anniversary  date  of  this  policy 
nearest  the  Insured's  attained  age  of  60  years,  should  that  be  prior;  but  the 
payment  of  such  additional  premium  and  the  liability  of  the  Company  under 
this  disability  clause  shall  terminate  on  the  anniversary  date  of  this  policy 
nearest  the  Insured's  attained  age  of  60  years,  except  that  if  the  Insured  shall 
furnish  due  proof  to  the  Company  that  he  has  become  totally  and  permanently 
disabled  as  hereinbefore  defined  after  the  anniversary  date  of  this  policy  near- 
est such  attained  age  of  60  years,  the  Company  will,  without  further  action 
on  the  part  of  the  Insured,  allow  the  subsequent  premiums  under  this  policy  to 
accumulate  with  interest  thereon  at  5  per  cent,  compounded  annually  as  an 
indebtedness  and  Hen  against  this  policy  until  such  time  as  the  total  indebted- 
ness under  this  policy  shall  equal  or  exceed  the  cash  value  thereof  at  which 
time  this  policy  shall  become  null  and  void,  subject  to  the  notice  provided  for  in 
the  loan  clause  of  this  policy;  but  no  monthly  payments  shall  be  payable 
hereunder  if  the  disability  occurs  after  the  anniversary  date  of  this  policy 
nearest  the  Insured's  attained  age  of  60  years. 


372    INSURANCE  PRINCIPLES  AND  PRACTICES 


V 


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378    INSURANCE  PRINCIPLES  AND  PRACTICES 


VI 


SAMPLE  PAGE  OF  LIFE  INSURANCE  RATE  BOOK 


^r-                Life 
^O           Premium  $20.70 

OK      Life    26  Payments 
^^          Premium  $26.90 

Cash  or 
Loan 

Paid 

Extension    | 

Yr 
3 

Cash  or 

Paid 

Entension 

Yr 

Up 

Yrs 

Days 
169 

Loan 

Up 

Yrs 
5 

Days 

3 

$  26  61 

$  71 

$  44  81 

$120 

358 

4 

36  04 

95 

4 

249 

4 

60  79 

160 

8 

93 

5 

45  76 

119 

5 

355 

5 

77  30 

200 

10 

236 

6 

55  77 

142 

7 

111 

6 

94  37 

241 

13 

40 

7 

66  09 

166 

8 

240 

7 

112  04 

281 

15 

210 

8 

76  72 

189 

10 

6 

8 

130  30 

321 

17 

339 

9 

87  67 

212 

11 

134 

9 

149  IS 

362 

20 

21 

10 

98  94 

236 

12 

245 

10 

168  71 

402 

21 

337 

11 

110  55 

259 

13 

325 

11 

188  90 

442 

23 

193 

12 

122  49 

282 

15 

0 

12 

209  78 

482 

24 

331 

13 

134  77 

304 

15 

356 

13 

23136 

522 

26 

31 

14 

147  39 

327 

16 

297 

14 

253  67 

562 

27 

36 

15 

160  36 

349 

17 

191 

15 

276  73 

602 

27 

358 

IS 

173  67 

371 

18 

42 

16 

300  57 

642 

28 

278 

17 

187  34 

393 

18 

215 

17 

325  23 

682 

29 

172 

18 

20137 

414 

18 

353 

18 

350  72 

722 

30 

51 

19 

215  77 

436 

19 

92 

19 

377  08 

762 

30 

?q5 

20 

230  50 

457 

19 

166 

20 

404  33 

801 

31 

190 

21 

245  59 

478 

19 

214 

21 

432  51 

841 

32 

116 

22 

26101 

498 

19 

239 

22 

46165 

881 

33 

99 

23 

276  76 

518 

19 

243 

23 

49179 

920 

34 

186 

24 

292  81 

538 

19 

229 

24 

522  97 

960 

36 

156 

25 

309  14 

557 

19 

198 

25 

555  22 

1000 

Paid  up 

25           Pr, 

E    30 

Paym 

Bnts 

OK      Life 
-^O          Pre 

20  Paymente 

jmium 

$24.6 

0 

mium  $30.40 

Cash  or 
Loan 

Paid 
Up 

Extension 

Yr 
3 

Cash  or 
Loan 

Paid 
Up 

Extension 

Yr 

Yrs 
5 

Days 

Yrs 

7 

Days 

'3 

S  38  14 

$102 

10 

$  55  31 

$148 

194 

4 

5171 

136 

6 

332 

4 

75  06 

198 

10 

167 

6 

65  73 

170 

8 

321 

5 

95  49 

248 

13 

195 

6 

80  22 

205 

10 

334 

6 

116  64 

297 

16 

241 

7 

95  19 

239 

12 

358 

7 

138  54 

347 

19 

238 

8 

110  66 

273 

15 

5 

8 

161  21 

397 

22 

121 

9 

126  63 

307 

16 

341 

9 

184  66 

448 

24 

238 

10 

143  12 

341 

18 

243 

10 

208  95 

498 

26 

233 

11 

160  17 

375 

20 

69 

11 

234  09 

548 

28 

125 

12 

177  77 

409 

21 

183 

12 

260  12 

598 

29 

30X 

13 

195  94 

442 

22 

228 

13 

287  07 

648 

31 

5i 
127 

14 

214  70 

476 

23 

210 

14 

314  97 

698 

32 

15 

234  06 

509 

24 

140 

15 

343  86 

748 

33 

188 

16 

254  04 

543 

25 

24 

16 

373  77 

799 

34 

264 

17 

274  67 

576 

25 

235 

17 

404  76 

849 

36 

27 

18 

295  96 

609 

26 

50 

18 

436  85 

899 

37 

270 

19 

317  93 

642 

26 

206 

19 

470  12 

950 

40 

42 

20 

340  59 

675 

26 

343 

20 

504  59 

1000 

Paid  up 

21 

363  98 

708 

27 

106 

21 

514  30 

22 

388  09 

740 

27 

229 

22 

524  23 

23 

412  95 

773 

27 

354 

23 

534  37 

24 

438  58 

805 

28 

129 

24 

544  70 

25 

464  99 

837 

28 

286 

25 

555  22 

APPENDIX 


379 


VII 
SAMPLE  PAGE  OF  INDUSTRIAL  LIFE  INSURANCE  RATE  BOOK 

ADULT  WHOLE  LIFE  POLICY,  Premiums  Terminating  at  Age  70 

INDDSTRIAL  POUCY— PARTICIPATING 
Payable  at  Death  Only 


Neil 
Btrtb- 
4Ay 


lO 

11 
la 

13 
14 

15 
16 
17 
18 
19 

20 
21 

aa 

23 
24 

^5 
20 
27 
28 
28 

30 
SI 
32 
83 
34 

36 

se 

37 
38 
39 
40 
41 
42 
43 
44 


AMOUNT  OF  INSURANCE  FOR  WEEKLY  PREMIUM  OF 


46 
46 
47 
48 
49 

60 
61 
62 
63 
64 

65 
66 
67 
68 
69 
60 


3 
Cents 


$89 
88 
83 
80 
77 

74 
72 
69 
67 
65 

C2 
61 
59 
B7 
55 

63 
52 
50 
49 

48 

46 
45 
44 
42 
11 

40 
38 
37 
36 
34 


S 

Cents 


«149 
144 
139 
134 
129 

124 

120 
115 
111 
108 

104 

101 

98 

96 

.92 

89 
87 
84 
82 
80 

77 
76 
73 
70 
68 

66 
64 
62 
60 
67 


Cents 


288 
278 
268 
258 

248 
210 
230 
222 
216 

208 
202 
19(5 
190 
184 

178 
174 
168 
164 
160 

154 
150 
146 
140 
136 

132 
1^8 
124 
120 


Cents   Cents 


$.... 


33 

65 

110 

32 

53 

106 

31 

61 

102 

29 

49 

98 

28 

47 

94 

27 

45 

90 

26 

43 

86 

25 

41 

82 

24 

40 

80 

23 

38 

76 

21 

35 

70 

20 

34 

68 

19 

32 

64 

18 

30 

60 

17 

28 

56 

16 

27 

54 

15 

25 

50 

14 

23 

40 

13 

22 

44 

12 

20 

40 

11 

18 

36 

402 

387 

372 
360 
345 
333 
324 

312 
303 

2!)4 
285 
278 

267 
261 
252 

246 
240 

231 
225 
219 
210 

204 

198 
192 
186 
180 
114  171 
1G5 
159 
153 
147 
141 

135 
129 
123 
120 
114 

105 

102 

96 

90 

84 

81 
75 
69 
66 
60 
54 


616 

496 
480 
4G0 
444 

432 

416 
404 
392 

380 
368 

356 
348 
336 
328 
320 

308 
300 
292 
280 
272 

264 
266 
248 
240 
_228 
220 
212 
204 
196 
188 

180 
172 
164 
160 
162 

140 
136 
128 
120 
112 

108 
100 
W2 
88 
80 
72 


Cents 


575 
555 
640 

620 
505 
490 
475 
460 

415 
435 
420 
410 

400 

385 
375 
385 
350 
340 

330 

320 
310 
300 
285 


30 
Cents 


666 
648 

624 
606 
588 
570 
652 

534 
522 
604 
492 
4S0 

462 
450 
438 
420 

408 

396 
384 
372 
3G0 
342 


3S 
Cents 


$... 


756 

728 
707 
086 
665 
614 

623 

609 

5b8 
674 
560 

539 
525 
511 
490 
476 

462 
448 
434 
420 
399 


40 
Cents 


45 
Cents 


832 
808 
784 
760 
736 

712 
696 
672 
656 
640 

616 
600 
584 
660 
644 

528 
512 
496 
480 
466 


50 
Cents 


909 

882 
855 
828 

801 
783 
756 
738 
720 

693 
675 
657 
630 
612 

594 
576 
558 
640 
513 


950 
920 

800 
870 
840 
820 
800 


55 
Cents 


979 
957 
924 
902 

860 


6o 
Cents 


770 

847 

750 

825 

730 

803 

700 

770 

680 

74d 

660 

726 

640 

704 

620 

682 

600 

660 

670 

627 

9S4 
060 

924 
900 
876 
840 
816 

792 
763 
744 
720 

684 


65 
Cents 


70 
Cents 


■':h 


Age 
Nell 
Birth- 
day 
When 
Insured 


14 

15 
16 
17 
18 
19 

20 
21 
22 
23 
24 

25 
26 
27 
28 
29 

30 
31 
32 
33 
34 

36 
36 
37 
38 
39 


Wfekly 
PretiiiuuA 

for 
Inaurniic* 

ol  t^OO 


275 

330 

385 

440 

495 

650 

605 

660 

40 

265 

318 

371 

424 

477 

530 

683 

636 

41 

255 

306 

357 

408 

459 

510 

5G1 

612 

663 

42 

245 

294 

343 

392 

441 

490 

539 

588 

637 

43 

235 

282 

329 

376 

423 

470 

517 

664 

611 

44 

225 

270 

315 

360 

405 

450 

495 

540 

535 

630 

45 

215 

258 

301 

344 

387 

430 

473 

516 

559 

602 

46 

205 

246 

287 

328 

369 

410 

451 

492 

633 

674 

47 

200 

240 

280 

320 

360 

400 

440 

480 

520 

5G0 

48 

190 

228 

266 

304 

342 

380 

418 

456 

494 

532 

49 

175 

210 

245 

280 

315 

350 

335 

420 

455 

490 

50 

170 

204 

238 

272 

306 

340 

374 

403 

442 

476 

160 

192 

224 

256 

288 

320 

352 

384 

416 

448 

150 

180 

210 

240 

270 

300 

330 
308 

3G0 

390 

420 

140 

168 

196 

224 

252 

280 

336 

364 

393 

135 

162 

189 

216 

243 

270 

297 

324 

351 

378 

125 

150 

176 

200 

225 

250 

275 

300 

115 

138 

161 

184 

207 

230 

253 

276 

110 

132 

154 

176 

198 

220 

242 

264 

100 

120 

1!0 

160 

180 

200 

220 

240 

90 

108 

126 

144 

162 

180 

198 

216 

laCenll 

20  •• 

21  " 

22  •■ 

23  •: 

23  •• 

24  •• 

26  •• 

26  •• 

26  ■• 

27  ■• 

28  '• 

29  " 

30  ■• 

30  •• 

31  •• 

32  " 

33  •• 

34  " 

36  ■• 

37  •■ 

38  •• 

39  •• 

40  •• 
42  " 
44  " 

45  •• 

47  " 

49  '• 

51  •• 

63  '• 

56  '• 

68  •• 

61  '• 

63  " 

66  ■• 


71 


One-half  benefit  first  six  months:  full  benefit  after  six  months.    Full  benefit  immediately  if  death  occurs  from  accident. 


EXPLANATION  OF  THE  ABOVE  TABLE 

In  the  table  printed  above  will  be  found  tbe  amount;,  of  insurance  which  will  be  issued  at  ages  10  next  birthday  and  upward,  for 
the  premiums  stated  in  the  different  columns,  on  the  "Whole  Life,  Premiums  Terminating  at  Age  70"  plan.  No  policy  will  be  written 
at  any  age  for  a  higher  premium  than  is  indicated  by  the  above  .table  at  that  age.  For  iostaace,  no  policy  will  be  written  at  age  30 
for  a  higher  premium  than  60  cents. 

There  are  a  great  many  people  who  would  like  to  secure  a  policy  for  an  even  five  hundred  dollars  and  who  still  want  to  pay  tb« 
premiums  on  the  weekly-payment  plan.  Such  a  policy  as  this  can  be  issued  on  the  life  of  any  person  whose  age  is  not  under  14  Bor 
over  50  years,  next  birthday,  and  who  is  in  good  health.  The  table  printed  above  gives  tbe  amount  of  weekly  premium  that  would 
be  required  at  each  age. 

Note. — No  further  premiums  payable  after  the  anniversary  of  the  policy  next  preceding  the  Insured's  seventieth  birthdaj. 


380    INSURANCE  PRINCIPLES  AND  PRACTICES 

VIII 
ASSIGNMENT  BLANK 


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APPENDIX 


381 


IX 


POLICY  LOAN  AGREEMENT 


I 

1 

1 

1 


41] 


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S3SS3NJ.IM 


382    INSURANCE  PRINCIPLES  AND  PRACTICES 


(ORIGINAL) 

RELEASE  OF  INTEREST 


The  consideration  for  which  polic No _ , »..-__,...«,„ —..-< 

open  the  life  of_ _ _ „ _......_ , 

issued  by  THE  MUTUAL  LIFE  INSURANCE  COMPANY  weU  assigned  to  'S  having  been  fully  saUsfied 
and  discharged,  we  being  of  legal  age,  hereby  release  all  right,  title  and  interest  In  said  polic 

fiHUttPHB  fZ  hand and  seal at .^ _ ^ .in  the  Sute  of 


..-day  of._ _ _ 19.. 

Signed,  Scaled  and  Delivered 
in  Presence  of 


I. 

f).  B, — This  OrlglaBl  should  be  attached  to  the  policy, 

NOTE— DUPLICATE    OF    THIS  IS  FILED   IN  HOME  OFFICE. 


It-  .J 


XI 
SURRENDER  OF  POLICY 


./9/_ 


riLU   IM    PLJtCB   AMD   &ATC 


For  a  Valuable  Gonsiderafion*  the  receipt  whereof  is  hereby  ac]cnowIe<lge<J,  we  surrender  to 

The  Mutual  Life  Insurance  Company*  Policy  No in  said  company 

on  the  life  of__ -and  all  clsums  thereunder,  and  request  that'thcro 

be  issued  in  lieu  thereof  a  poHcy  of  like  amount  on  the^.. 

plan,  bearing  date in  favor  of 


my ,  with privilege  to  change  the  beneficiary 

WeJhevebr  d»«l«re  Ikal  no  proo««dinA«  in  bankruptor  bar*  aver  been  insttlnted  Ity  or  aAaioel  aa  and  the  abore  ohanA* 

!■  BOW  viade  and  aeeepled  opoa  ancb  deelarativn. 

WITNESS.  .  Tobesijnea 

ID  person  by 

each  of  the 
^— i^^  ■■'  '■"     -.III  parties  liavjns  ■  — — — .  .   .,  .    ...  ^,.^. 

an  interest  in 
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^  (he  policy,  in* 
^"^"■■"  ■  '  cludins    iD9ur< 

ed.  beneOctsry 
^^^_j^____^__,„,,^..„...„_,.__^____.,^.,_        and  assigos.  if  i 

any    and    ench 

sifrnalure  to  be 

4oljr  witncsMd 


APPENDIX 


383 


XII 

PROOF  OF  DEATH  (CLAIMANT'S  STATEMENT) 


Polity  Ko.. 


.Date  of  Policy ~.o .t^ uim'l  Claimed.  $... 


E^rrr    a>r«<>oi>    In  .Thr«r    Dlanka    >In«t    Be    Dlatlnrtlr    •»<]    FoIlT   ABalTcr*d,  «b4   Ikr   C«mp*V7   R*a*rr*a  Ik*  RIckt  t*  R«««tT* 
fkrv    iBformallon    MhoDld    l<    U«    Deemed    N>resMir7< 

B«for«  Maklns  Oat  Thia  Slafcmcnl,  Read  Carefullj  the  laalmeflaBa  on   Pas«  4  *'  TkU  BlaBk.. 


1.— «.     Nam«  of  Claimants  in  full.  (Write  namn  Irgibly.) 

—  . 

" 

b.    Agt  of  ClaimaMs. 

c.     Rcsidtntt  of  Claimants.     (P.  0.  Address.) 

^ 

<If   anr   of   Ibe    Clolmanfa   ar^    minora,   certlfled    eopy   of 
L*t<era  of  GiiardUaahlp  aiiuit   be  turouhed.  nllli   the  jiroofa 
ot  dealk.) 

2.— «.     Name  of  Deceased  in  full. 
b.     Legal  Residence. 

j,                          ,.     ,,          _ 

..      -                    { o.     When  policy  was  issued. 
3.     Occupafon.  J  ^      At  timTol  death. 

^                                                                                    „ 

4/— «.     Place  of  Binh. 

t 

*.     Date  of  Birth. 

t.     State  source  from  which  date  of  binh  was  obtained. 

S^-o.     Place  of  Death. 
b.     Date  of  Death. 

b.  Yiar, Monlli,- 

....^J}ate 

Hour  ■ 

j1.  M.  ,r  P.  M. 

(. — a.     How  long  have  you  been  acquainted  with  the  deceased  ? 
b.    In   case   of   widow,    state    how    long  you    have   been 

b                                ..... 

married  to  the  deceased. 

T. Have  yon  seen  and  identified  the  body  of  the  deceased? 

>. — Name  and  residence  of  every  physician  who  attended  or 
preacribed  for  the  deceased  during  the  year  prior  to  death. 

_ _... 

9. — !•  Ibe  laid  policy  in  jour  possession? 

141. — a.     Has  the  policy  ever  been  assigned?     If  »o,  to  whom 
and  when? 

"■ 

*.     Are  there  any  endorsements  on  the  polic>',  other  than 
those    made    by    the    Company?      If    so,    furnish    a 

* - ---- 

- 

iworn  copy. 

JU — Was  a  Coroner's  inquest  held?     If  so,  furnish  the  Com- 
pany with  a  certified  copy  of  the  verdict. 

12^—4.     In  what  capacity,  or  by  what  title,  do  you  make  the 
claim? 

„       ..^ „. 



b.    Are  yoD  legally  entitled  to  receive  the  entire  amount 
payable  on  the  Policy? 


13^— Was  the  deceased,  at  the  time  of  hii  death,  insured  in  any 
other  Companies?  If  so,  in  what  Companies,  and 
for   what   amount  in   each   Company? 

|4y— Are  there  any  proceedinga  in  bankruptcy  now  pending 
against  the  msurrd  or  any  of  the  claimants? 


Having  been  duly  s%Torn, — 

knowledge  and  belief. 

Witoeaa- -..hand this—.-.. 


•  hereby  depose  and  say  that  the  answers  to  the  above  questions  arc  true,  and  full,  to  the  best  of- 


Stale  of ..: 

Courtly    of  . 


>ss. 


Cn  ikit. 


..day   of.. 


../p.. 


personally  appeared  before  me  the  above  named 


•o  me  known,  who  subscribed  the  foregoing  statement  in  my  presence  inj  made  oath  that  the  answers  Jo  the  questions  therein  made  by are 

Iroe  atnl  full,  i.i  ihe  best  of — knowledge,   recollection -any  belief- 


Each  affidavit  mu)it  be  miule  before  a  noiair  pnblle  or  other  ofttccr  duly  authorized  to  admliJster  oaths  aud  his  ofllclal 
•ral  attached,  or,  if  he  li.i»-o  no  seal,  his  authorltx  JubI  ttte  gcnuineoesa  ot  his  alKnatnre  must  be  attested  by  the  clerk  of  a  couat 
ol  record. 


384    INSURANCE  PRINCIPLES  AND  PRACTICES 


(B) 


XII — Continued 
STATEMENT  OF  THE  UNDERTAKER 


The  Undertaker's  Certificate  is  to  be  executed  by  the  undertaker  or  sexton  who  interred  the  deceased.     II  necessary,  H 
may,  with  slight  change,  be  executed  instead  by  the  clergyman  who  officiated  at  the  interment 


In  Proof  of  the  Death  of.. 


1.— d.    Name  of  Drcfaied. 

b.    Rcsidfnce  and  occupaiioD, 
t.    Age  of  deceased. 


Were  you  penooaUy  acqi^inted  with  the  deceased? 

h.    U  so,  state  for  bow  loDg. 

r.  Do  you  know  the  body  interred  by  you  to  be  that  of 
the  person  described  in  the  accompanying  statement 
of  the  claimant  in  this  case? 


].— Place  and  Dale  of  Death. 


4.— 'Place  and  Date  of  Intermeot. 


e.  Year^.. 


Moiuhf. 


Day» 


Place. Dale 


Place.- 


Dsle 


Having  been  duly  twom,  I  bereby  depose  and  make  oatb  thai  the  answers  to  the  foregoing  questions  are  true,  to  the  best  of  ay  knowledge 
and  belief. 


Dated  at 


-,  tbi»- 


-.day  of- 


..1»~ 


State  0/ 

County   of . 


On  this.- 


•  day  of-.. 


..19 :,  personally  appeared  Ibefore  me  ibe  above  named 


-« — ." to  rae  known,  who,  being  by  roe  duly  sworn,  deposed  that  the  answers  (o  the 

Obove  questions  arc  full  and  true,  to  the  best  of  his  knowledge,  iofonsatioa  and  belief,  and  subscribed  the  same  in  my  presence. 


<cy 


STATEMENT  OF  AN  ACQUAINTANCE 


This  Certificate  is  to  be  executed  by  some  responsible  householder  intimately  acquainted  with  the  deceased,  who  has  seen 
'the  body,  and  is  not  interested  in  the  .claim. 


In  Proof  of  the  Death  of.. 


I.— How  long  have  you  known  the  deceased? 

2.— Place  and  date  of  Death. 

Place - 

Date - 

-- 

3.— Have  you  seen  the  body  of  the  person  deceased,  and  is.tr, 
to  your  knowledge,  the  body  of  the  person  described 
in  the  above  named  Policy  of  Insurance? 

•»  —State  all  the  facta  within  your  knowledge  relating  to  the 

cause  of  death. 

w 

. — 

■    ■ ■ 

Having  been  duly  sworn,  I  hereby  depose  and  say  that  the  aaswers  to  the  above  questions  are  true  and  full,  to  the  beat  of  my  koowledgs 
•Bd  belief;  and  that  I  bave  do  inteusi  in  the  above  Policy. 


Dated  at 

Slate   of 

County   of . 


lbi»...~ «. day    of... 


Oo  this. day  of- 


P.  O.  Address- - - — - 

19 ,  personally  appeared  before  rae  the  above  named 


^ _. _ ,o  me  known,  who,  being  by  me  duly  sworn,  deposed  that  the  answers  to  tbt 

above  questions  are- full  and  true,  to  ihe  best  of  his  knowledge,  information  and  belief,  and  subscribed  the  same  in  my  presence. 


E«h  Affldarft  must  be  made  before  a  notary  pubUc  or  other  ofBcer  duly  aothorlxed  «f  ,^,^'?h?'II;!l  c'i«k  rf°.°S,^ 
tiachcd;  or.  It  he  have  no  .cal,  hi.  aatbmlty  and  the  gcDolneneas  of  hia  algnatort.  mast  bo  attested  by  the  clerK  of  a  court 


seal  attached 
of  record. 


APPENDIX 


385 


Xll— Continued 
ATTENDING  PHYSICIAN'S  STATEMENT 


(D) 


Ttit  Attending  Phy^cian's  Ctrtificaie  is  to  be  executed  by  the  physician  attending  the  deceased  In  his  last  illne^ 
If  more  than  one  physician  were  employed,  the  certificate  of  each  must  be  obtained.  The  entire  certificate  must  be  in  th« 
handwriting  of  the  physician. 


/n  Proof  of  Ihe  Death   of.. 


1.— How  long  have  you  pr'aciiced  as  a  physician,  anj  whctf 
did  you  rrcfivc  your  mrdical  rducation? 

2. — Namf  of  dccrasrd. 
Rfsidrncr. 
Occupation. 

- - - "■-. 

3 — How  long  have  you  been  acquainted  with  the  deceased^ 

4. — Were  you  (he  attending  physician  of  deceased  before  last 
ttckness?     If  so.  when,  how  long,  and  lor  what  disease 
did  you   prescribe,  or  were  consulted?     C'lve  full  anJ 

■■ - - 

5.— Were  you  (he  attending  physician  of  deceased  during  Ijsi 
sickness,   and  up  to  the  time  of  death? 

6- -Date  oi  your  first  prescription? 


7 — Date  of  your  last  visit? 


8— d.     Date  of  death. 

b.     Duration  of   last  illr.rss 


State  the  remote  cause  of  death;  if  from  disease,  give 
the  predisposing  causes,  date  of  the  first  appearance 
of  its  5>'mpiom5,  its  history,  and  the  symptoms  present 
during  its  progress. 

State  the  immediate  cause  of  death. 


Cr     tl  death  was  not  due  to  disease,  state  whether  it  was 

Caused   by    suicide,    atfcidcni    or    any   other    agency. 
Civr  full  particu1ar9. 

di  Was  a  Post-Morttm  exaniinaiion  niadc;'by  whom,  and 
with  what  results? 

#,  Had  deceased  any  other  disease,  acute  or  chronic,  or 
had  he  ever  had  any  injury,  infirmity  or  surgical 
operation? 

/.  Was  there  anything  m  the  habits,  or  mode  of  life  or 
residence  of  deceased,  predisposing  him  to  disease? 

if.     Stair  the  apparent  age  of  deceased, 

]0.-*S!atf  whether,  in  your  opinion,  the  disease  or  death  was 
superinduced  by  intemperance  of  any  kind. 

11.*- Did  the  deceased  have  any  hereditary  predisposition  to 
ihr  disease  of  which  he  died?  If  so,  please  state  the 
farliculjrs. 

T"*'     "  ■  -        ■  ■  -.wii— ii»w    ■-"•-■.—     '       ^.       —    .■        I.  .I,-^—...,.  , 

Having  been  duly  sworn,  t  hereby  depose  and  say  thai  the  statements   in  the  furrtzcing  ;.nswers  aic  true,   and   fu!l,  to  ihe  best  of  fOf 
knowledge  and  belief;  and  that  iheie  arr  no  nuterial  facts  in  the  case  ^vhich  are  rot  d^sclcKed. 


Dated  ai« 


this— — •^» day    of 


..19-. 


State  of  ,:.«».^ „„ 1 

County    o/  ..:..-...- J 


Attending  Phyijcian. 


P.  O.  Address-  . 


Oa  itiii 


^■.,day    of— 


...J^— ^  prrsonatly  appeared  before  me,  the  above 


jiamed    ..-.—.«. -.j...„...™..*™ '. —...-.- -.«.«...„..._—...« -....    to  me  Irown  as  a  physician  in  regular  sfandtn;*.  who  being 

tiy  mc  duly  sworn,  deposed  iha*  the  answers,  to  the  above  queiiions  are  full  and  true,  lo  ihc  besi  of  his  knowledge,  informat'oit  and  belief,  anJ- 
VUbscrihed  the  $.;nic  in  ir.y  pretrnce'. 


Earh  nflMHvlC  must  be  inado  before  a  riotAry  public  or  e»ther  officer  duly  nuthorixed  to  administer  oalh-*  nnd  Ms  ofTirlal 
mo]  aetnrhert,  ur,  U  lie  hn\e  no  scnl,  his  authorUy  and  tho  genuineness  of  lUs  signature  must  be  attcslrd  by  the  clerk  of  a  court 
of  record. 


386    INSURANCE  PRINCIPLES  AND  PRACTICES 


XII — Continued 


^ 

«        8(1      ' 
:       : 

1    1    i    i 

! 

: 

•  w4 

J 

:       :       o 

K      ■     o>      i       I 

Id 

J 

3  d  < 

^U  « 

* 

b 

i 

c 

3 

2 

•       : 

Mil 
i    M  !<  ^ 

IS 

< 

2    O 

c 

J       i       : 

ttrance 

th 

ment.. 

m  Pai 

t> 

04 

V 

> 

lli  1 

•S    Cl    <C      1     E    ^ 

1 .  ^    i    J:    ' 

r 

fS 

c 

ui  1 

:   3   3   1    ^5    £ 

a 

.    •-)     ^!       ft 

;    Q    Q    Q    >5    «^    Ot 

) 

1        i 

:::::!      1 
:::::;: 

Premium  Notes  $ 

Interest  on  do  

Automatic  Loan 

Deferred  Premium  

Option  Settlements  

Interest  on  do  

<^    ««i    w 


^1 


•5  "2  "  5 

a  ^  •?  ^ 

2  ^  \,  *^ 

4  oi  Q  OS 


0. 


^5  cJ; 


as 
«2 


(DO  NOT  WKPTB  OR  PASTE  AMTTBINO  ON  TBI9  PACS.) 


Tht  Proofs  of  the  Claim  under  Policy  No „.„... ....» 


i        I. 

19 

...insuring  tht  lift  «/ 


Dollars,  have  teen  duly  examined,  and  settlement  thereof  is  hereby  authorited. 
CORJRECT 


Saft.  Claimt. 


President. 


Medical  Director. 


INSTRUCTIONS 


READ     CAREFULLY 

It  th«  policy  bmrs  data  prcTinu  t»  Jane  1,  1871,  furnish  a  copy  or  the  written  portion  of  the  policy,  and  atate  the  number  of  tk* 
form  upon  which  It  Is  written   (thla  can  be  found  under  the   Revenue  Stamp). 

The  Claimant's  Certificate  Is  to  be  executed  by  the  person  legally  entitled  to  receive  the  money,  who  must  state  by  what  title  h» 
or  she  makes  the  claim,  whether  as  the  bencHclary  named  In  the  policy,  or  as  executor  or  administrator,  or  as  guardian,  or  other  legaj 
representative  of  a  minor,  or  as  a  trustee,  or  as  assignee.  In  caae  of  onuisnment.  interest  must  be  proved,  and  a  copy  of  the  assign- 
ment furnished.  Executors,  qdmlnlntmloro  and  Gpaar4lans  must  send  certified  copies  of  their  appointment  and  certificate  of  qualifica- 
tion. Trustees  must  exhibit  their  authority.  Where  policies  are  payable  to  heirs  evidence  as  to  heirship  must  bo  submitted  for  wblcb 
purpose  blanks  will  be  furnished. 

Every  question  must  be  distinctly  and  fully  answered,  all  being  legibly  written  in  ink.  The  company  reserves  the  right  to 
ask  any  further  questions  necessary  under  the  circumstances  of  any  particular  case. 

All  papers  in  a  foreign  language  must  be  accompanied  by  a  sworn  translation,  and  if  the  oath  be  administered  in  a  foreign 
country,  the  official  character  of  the  person  administering  the  same,  or  of  the  clerk  or  other  officer  of  a  court  certifying  tbereta 
must  be  authenticated  by  a  Consul  or  Minister  of  the  United  States,  residing  in  such  foreign  country. 


APPENDIX 


387 


XIII 
PROOF  OF  DEATH  (AGENT'S  STATEMENT) 


m 


The 

Policy  No. 


Mutual  Life  Insurance  Co. 

AGENT'S  STATEMENT  ^ 


Date  of  Policy- 


rr  IS  IMPORTANT  THAT  AGRNT'  SHOtTLD  FILL  OUT  THIS  BLANK  'niTH  CARE,  ■■  the  Companr  Kile*  mach  span  tk« 
ftBnrera  b1t«ii  by  tbr  AjcrnC  to  the  qacal  na  propoonded.  'Whrn  thej  connot  anawpr  the  qarstlooa  from  pemonal  knovrledge,  they  are 
reqveated    to    do   ao   apoa    their   l>es<   kno^vledKe,   Information   or   belief,  atatlns  the  ^ronnda  of  aarh  koowledce.  Information  or   belief. 

Agents  can  greatly  facilitate  the  settlement  of  Claims  if  they  will  see,  before  forwarding  proofs,  that  all  blanlcs  have  been 
properly  filled  and  every  question   answered;  also  that  the  instructions  have  been  strictly  carried  out. 

In  many  cases  a  letter  from  the  Agent,  giving  the  information  in  his  possession  regarding  the  claim,  will  clear  up  doubtful 
points  and  prevent  delay  in  settlement. 


1.— tj.  Name  of  Deceased* 

a „ 

b 

c.  Occupation. 

c 

2.— Place  and  Date  of  Death. 

Place  Date  

3. — Have  you  seen  the  body  of  the  person  deceased,  and 
is  it  to  your  knowledge  the  body  of  the  person  de- 
scribed in  the  above  named  policy  of  insurance? 

4. — If  you  have  not  seen  and  identified  the  body,  have 
you  satisfied  yourself  by  other  evidence,  and  if  so. 

what,  as  to  the  identity  of  the  decedent,  with  the 
person  insured  under  the  above  policy? 

5. — State  all  the  facts  and  circumstances  within  your 
knowledge  relating  to  the  cause  of  death. 

6. — Is  there  any  circumstance  within  your  knowledge, 
information  or  belief,  or  have  any  facts  come  to 

your   knowledge,    inconsistent   with   the   statements 
made  in  the  application  of  the  insured? 

7. — Had  the  deceased,  within  your  knowledge,  violated 
any  of  the  conditions  of  said  Policy  of  Insurance? 

8. — a.  Give  date  of  last  Premium  payment  on  said  policy. 

b.  Amount  of  last  premium  paid. 

c.  State  whether  Annual,  Semi-Annual  or  Quarterly. 

b.  Gross  $ Dividend  $ Net  $ - 

9. — Do  you  know  of  anything  invalidating  the  right  of 
the   parties  in   interest  to   recover   the   amount   in- 
sured by  said  Policy? 

10.     »^Have  you  examined  the  proofs,  and  do 
they  conform  to  the  instructiona  on  the  back 
of  the  proof  blanks? 

11. — Do  you  believe  all  the  statements  in  the  certificates, 
marked  A,  B,  C  and  D,  to  be  true  and  correct? 

Paled  aC- 


Jhit. 


jday  o/_ 


./9_ 


Atait. 


CounlenlgneJ  by- 


Cer.trat  AgenL 


388    INSURANCE  PRINCIPLES  AND  PRACTICES 

XIV 

WISCONSIN  VALUATION  REPORT  ON  FRATERNAL  SOCIETIES 


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APPENDIX 

XIV — Continued 


389 


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390    INSURANCE  PRINCIPLES  AND  PRACTICES 


XV 


SUMMARY  OF  OPERATIONS  OF  WAR  RISK  INSURANCE  BUREAU 

(LIFE) 

June  30,  1920. 

Policies  Amount 

Term   insurance    (temporary)    policies   issued 4,617,593  $40,155,148,000 

Terminated  by  expiry 125,110  1,141,438,000 

Revoked    7,100  58,589,000 

Converted  policies  issued 152,979  511,821,500 

To  officers    19,479 

To  enlisted  men 133,500 

Average  size  of  converted  policies,  $3,346. 
Converted  policies  terminated  by  death  and  disability,  378,000 
Ratio  of  death  losses  to  American  Experience  Table,  40  per  cent. 
Classification  of  converted  policies  issued: 

« 

Policies  Amount 

Ordinary  Life    17,462  $  77,986,000 

20-Payment  Life    45,208  182,830,500 

30-Payment  Life   4,184  19,859,500 

20-year  Endowment   17,011  168,276,000 

30-year   Endowment    8,925  35,353,500 

Endowment  at  age  62 6,189  27,516,000 

Total    152,979  $511,821,500 


APPENDIX 


391 


XVI 
ACCIDENT  AND  HEALTH  POLICY 

TEN  DOLLAR  ACCIDENT  AND  SICKNESS  POUQ" 

Paying  indemnity  for  Lou  of  Life  by  Accidental  Means  a<  prorided  by  Part  V  and  for  lot* 
of  Life,  Limb,  Limbt  or  Sight  by  Accidental  Mean*  as  Provided  in  Part  I,  and  for 
Lots  of  Time  by  Accidental  Means,  and  Sickness,  and  Indemnity  for  Cer- 
tain Fractures  and  Identifying  Service,  to  the  extent  herein  provided. 


MAXIMUM  DEATH  BENEFIT 

Under  Part  I 

$7500.00 

No- 


maximum  WEEKLY  ACCIDENT  INDEMNITY 

Under  Part  II 
$50.00 

WEEKLY  SICKNESS  INDEMNITY 
$25.00 


(Eafiualtg  (Enmpang 


(HEREINAFTER  CALLED  THE  COMPANY) 

4ltl   Ql'IlttStUPrSIlOtt  Ot   the  sutements  in  the  application,  a  copy  of  which  is  endorsed  hereon  and  made  psrt  hereof,  tad 
OF  TEN  DOLLARS  ($10.00)  PREMIUM 

fiprpbg  ilnaurpB ~ 

subject  to  all  the  provisions  and  limitations  herein  contained,  for  the  term  ot  ONE  YEAR  from  noon,  standard  time  of  the  day  and 
at  the  place  this  policy  is  dat^d,  against  the  effecu  of  BODILY  INJURIES  caused  directly,  solely  and  independently  of  all  other 
causes  by  External,  Violent  and  Accidental  means,  which  bodily  injuries  or  their  effects  shall  not  be  caused  wholly  or  in  part,  directly 
or  indirectly,  by  any  disease,  defect  or  infirmity,  and  which  shall  irom  the  date  of  the  accident  result  in  continuous  disability  and 
also  against  the  effects  of  SICKNESS,  as  follows: 

ACCIDENT  BENEFITS 


PART  1                                                                                   Value  First  Year  Annual  Increase                 Value  After  Fifth  Year 

Under  Part  1  Under  Part  1                              Under  Part  I 

For  Loss  of  Life    $5,000.00  $500.00                                         $7,500.00 

For  Loss  of  Both  Eyes  3.500.00  350.00                                           5.250.00 

For  Loss  of  Both  Hands    3,500.00  350.00                                           5,250.00 

For  Loss  of  Both  Feet 3,500.00  350.00                                           5,250.00 

For  Loss  of  One  Hand  and  One  Foot  3,500.00  35000                                           5.250.00 

For  Loss  of  One  Hand  875.00  8750                                           1,312.50 

For  Loss  of  One  Foot 87500  87.50                                           1.312.50 

For  Loss  of  One  Eye    375.00  35.00                                              550.00 

Resulting  within  thirty  days  from  date  of  accident  solely  from  such  injuries,  but  only  when  such  injuries  are  sustained  whils 
actually  riding  as  a  passenger  in  a  place  regularly  provided  for  the  transportation  of  passengers  only,  within  a  railroad  car,  elevated 

subway  or  interurban  railroad  car,  street  car  or  steamboat,  provided  by  a  common  carrier  for  passenger  service  by  reason  of  the 
wrecking  of  any  such  car  or  steamboat;  or 


PART  II  FOR  LOSS  OF  TIME— FIFTY  DOLLARS  (50.00)  PER  WEEK 

Not  exceeding  ten  consecutive  weeks  if  injury  sustained  in  the  manner  specified  in  Part  I  shall  not  cause  any  of  the  Losses 
in  Slid  Part  I  mentioned,  but  shall  from  the  date  of  the  accident  continuously  and  wholly  prevent  the  Insured  from  attending  to 
any  and  every  kind  of  business  or  labor 


WEEKLY  INDEMNITY 
t>ART  m.  FOR  LOSS  OF  TIME— TWENTY-FIVE  DOLLARS  $(25.00)   PER  WEEK 

Not  exceeding  ten  consecutive  weeks,  if  such  injuries  shall  from  date  of  accident  continuously  and  wholly  prevent  thS 
Insured  from  attending  to  any  and  every  kind  of  business  or  bbor.  but  only  when  such  injuries  are  sustained  in  the  manner  specified 
in  Clauses  1  to  16  of  this  Part  III. 

1.  WHILE  ACTUALLY  RIDING  AS  A  PASSENGER  IN  A  PLACE  regularly  provided  for  the  transportation  of  passeif 
gers  only,  within  a  railroad  car.  elevated,  subway  or  interurban  railroad  car,  street  car  or  steamboat,  provided  by  a  common  carrier  for 
passenger  service ;  or 

2     WHILE  A  PASSENGER  WITHIN  AN  ELEVATOR  provided  for  passenger  service  only;  or 

3.  BY  THE  BURNING  OF  A  DWELLING,  HOTEL,  OFFICE  BUILDING.  THEATRE,  SCHOOL,  CHURCH,  LODGE 
SOOM,  CLUB  HOUSE,  STORE  OR  BARN,  in  which  the  Insured  may  be  burned  by  lire  or  JuSocated  by  smoke,  provided  the  Insured 
shall  not  be  assisting  or  acting  as  a  watchman,  policeman,  or  a  volunteer  or  paid  fireman ;  or 

4.  WHILE  WALKING  ON  A  PUBLIC  HIGHWAY,  by  being  injured  by  actual  contact  with  a  bicycle  or  any  moving  con- 
veyance or  vehicle,  provided  the  Insured  is  not  or  has  not  been  employed  or  engaged  on  or  about  the  conveyance  or  vehicle  or  is  not 
•topping  or  attempting  to  stop  a  runaway  ;  or 

5.  WHILE  RIDING  WITHIN  A  PRIVATE  AUTOMOBILE,- not  being  used  for  any  business  purpose  or  any  work  what- 
soever and  provided  that  the  Insured  shall  not  be  a  hired  operator  thereof  (but  this  exception  shall  not  apply  to  any  physician  or 
aargeon  then  employed  in  the  practice  of  his  profession  or  any  commercial  traveler  or  buyer  selling  or  buying  goods  from  sample  for 
future  delivery  only,  collectors  of  accounts,  or  regularly  licensed  real  estate  and  insurance  agents  in  their  pursuit  of  business)  ;  and 
only  in  case  of  accident  which  shall  materially  injure  the  automoiiilc;  or 

6.  WHILE  RIDING  UPON  A  BICYCLE  (not  a  motorcycle)  and  caused  solely  and  directly  by  reason  of  a  collision  with 
another  bicycle  or  any  moving  conveyance  ;  or 

7.  WHILE  RIDING  UPON  A  MOTORCYCLE  and  caused  solely  and  directly  by  reason  of  a  collision  with  any  moving 
conveyance,  except  another  motorcycle,  and  not  being  used  for  any  business  purpose  or  any  work  whatsoever  (but  this  exception  shall 
not  apply  to  any  physician  or  surgeon  then  employed  in  the  practice  of  his  profession,  or  any  commercial  traveler  or  buyer  selling  or 
buying  goods  from  sample  for  future  delivery  only,  collectors  of  accounts,  or  regularly  licensed  real  estate  and  insurance  agents  in  their 
vsual  pursuit  of  business)  :  or 

e.  AT  THE  HANDS  OF  ANY  BURGLAR.  HIGHWAYMAN  OR  ROBBER  when  robbing  the  Insured  by  force;  or 

9.  BY  THE  EXPLOSION  OF  A  STEAM.  STATIONARY.  LOCOMOTIVE,  OR  MARINE  BOILER,  when  such  explo- 
Sioit  causes  destruction  of  such  boiler;  or 

10.  BY  A  REGULARLY  LICENSED  PHYSICIAN,  SURGEON.  DENTIST.  UNDERTAKER  OR  NURSE  accidentally 
cutting  or  wounding  himself  while  holding  an  autopsy  or  performing  a  surgical  operation  and  simultaneously  therewith  becoming  inocu- 
lated with  poison;  or 


392    INSURANCE  PRINCIPLES  AND  PRACTICES 

XVI — Continued 

n.  WHILE  RIDING  WITHIN  A  CONVEYANCE  drawn  by  horse  power,  provided  that  the  Insured  shall  not  then  be  a  hired  drivef 
«hereof  nor  be  riding  or  dnving  in  or  upon  any  conveyance  conuining  any  merchandise  or  used  for  any  business  purpose  or  any  work  whatsoever 
(bnt  this  exception  shall  not  apply  to  any  physician  or  surgeon  then  employed  in  the  practice  of  his  profession  or  any  commercial  traveler  or  buyer 
■eUing  or  buying  goods  from  sample  lor  future  delivery  only)  and  only  in  case  of  an  accident  which  shall  materially  injure  the  conveyance ;  or 

12.  By  being  KICKED  BY  A  HORSE  OR  GORED  BY  A  BULL  OR  COW;  or 

13.  WHILE  GETTING  ON  OR  OFF  OR  BEING  ON  THE  STEP  OR  PLATFORM  OF  ANY  CONVEYANCE  specified  in  Part  I:  or 

14.  WHILE  ACTIVELY  ENGAGED  IN  FARMING,  by  actual  contact  with  and  while  operating  a  THRESHING.  MOWING  REAPING 
or  BINDING  MACHINE.  HARROW  or  PLOW:  or 

15.  BY  BEING  STRUCK  BY  LIGHTNING.  CYCLONE,  or  TORNADO,  as  defined  by  the  United  States  Weather  Bureau;  or 

16.  WHILE  WALKING  ON  A  PUBLIC  STREET  OR  SIDEWALK,  by  being  struck  by  a  falling  sign-board,  awning,  brick,  stone,  or 
other  debris  falling  from  a  building  (except  buildings  in  process  of  construction,  repairs  or  demolition 


PART  IV 


FRACTURE  OF  BONES  BY  ANY  ACCIDENT 


FOR  LOSS  THROUGH  THE  COMPLETE  FRACTURE  OF  ANY  BONE  IN  THIS  PART  MENTIONED  BY  ANY  ACCIDENT  IN 
OR  OUT  OF  BUSINESS,  except  if  covered  under  Parts  I.  II  or  III,  as  follows: 


SkuU $150.00 

Pelvis,  haunch  bone 150.00 

Jaw.  upper  or  lower 50.00 

Femur,  thigh  50.00 

Radius  and  Ulna,  fofearm,  both  bones. .     50.00 
Radius  or  Ulna,  either 25.00 


Spine,  Vertebrae  $100.00 

Scapula,  shoulder  blade  100.00 

Humerus,  upper  arm  50.00 

Sternum   breast  bone  25.00 

Ribs,  one  or  more 25.00 


Patella,  knee  bone  ; $50.00 

Tibia  and  Fibula,  lower  leg,  both  bones     50.00 

Tibia  or  Fibula,  either 25.00 

Clavicle,  collar  bone 25.00 

Coccyx,  end  of  spine 25.00 


But  in  case  of  more  than  one  such  fractures,  payment  shall  only  be  made  for  one  thereof,  the  Insured  having  the  right  to  elect  for  which  fracture 
payment  shall  be  made 

PART  V. 

The  C^pany  will  pay  Tor  loss  of  life  of  the  Insured  which  results  within  thirty  days  from  date  of  accident,  solely  from  sucRSnjuries  caused 
by  an  accident  in  or  out  of  business  if  not  otherwise  covered  by  this  policy,  and  which  shall  have  caused  continuous  total  disability  from  date  of 
acddest  to  date  of  loss,  the  sum  of  ONE  HUNDRED  DOLLARS  ($100.00). 


PART  VI. 

II  the  Insured  shall  in  consequence  of  ANY  ACCIDENT  IN  OR  OUT  OF  BUSINESS  not  otherwise  covered  by  the  policy  be  continuously 
con6ned  within  the  house  and  regularly  visited  therein  by  a  Licensed  Physician,  not  leaving  it  at  any  time  for  any  purpose  whatsoever  and  shaU 
be  wholly  prevented  from  attending  to  any  and  everv  kind  of  work  or  business,  for  a  period  of  not  less  than  thirty  (30)  consecutive  days  from  date 
of  the  accident,  the  Company  will  pay  the  sum  of  TWENTY-FIVE  ($25.00). 

PART  VIL 

HOSPITAL  BENEFITS 

FOR  LOSS  FROM  CONFINEMENT  IN  A  PUBLIC  OR  PRIVATE  HOSPITAL  in  his  home  town  or  in  a  hotel  or  hospital  away  Irom  his 
borne  town,  for  not  more  than  five  consecutive  weeks,  resulting  fropi  such  injuries  caused  by  ANY  ACCIDENT  IN  OR  OUT  OF  BUSINESS 
■for  which  no  other  indemnity  is  provided  by  this  policy,  and  which  causes  continuous  total  disability  from  its  date. 

TWENTY-FIVE  DOLLARS  ($25.00)  PER  WEEK 

S^ART  VIII 

SURGEON'S  FEES— NON-DISABLING  INJURIES 

If  the  Insured  suffers  injury  in  any  manner  described  in  Parts  II  or  III  hereof,  and  such  injury  shall  not  result  in  either  disability  or  death, 
Vut  shall  require  medical  or  surgical  treatment  by  a  legally  qualified  physician  or  surgeon,  the  Company  will  reimburse  the  Insured  for  the  cost 
thereof  in  an  amount  not  to,^exceed  TEN  DOLLARS  ($10.00),  the  attending  physician's  or  surgeon's  receipt  for  services  being  deemed  sufficient 
proof  under  this  clause,  but  such  receipt  must  be  furnished  the  Company  within  90  days  from  the  date  of  accident. 


PART  IX. 

SICKNESS  BENEFITS 

If  the  Insured  shall  be  continuously  confined  within  the  house,  not  leaving  it  at  any  time  or  for  any  purpose  whatsoever,  and  regularly 
visited  therein  at  least  once  in  every  seven  days  by  a  Licensed  Physician  and  be  wholly  prevented  from  transacting  any  and  every  kind  of 
business  solely  by 


Abscess  of  Brain 

(when  operated  upon) 

Achondroplasia 

Acne 

Acromegaly 

Acute  Lead  Poisoning 

Acute    Yellow    Atrophy 
of    Liver 

Addison's  Disease 

Aneurism  of  Aorta 

Appendicitis 

initial  attack  and  only 
when  operation  for 
removal  o  f  appendix 
is  performed 

Asiatic  Cholera 

Anaemia  or  Chilblain. 

Barber's  Itch 

Boils  (Furuncle) 


Bubonic  Plague 

Calentura  Fever 

Cancer 

Carbuncle 

Charcot's  Joint  Disease 

Chicken  Pox 

Chorea  (St.  Vitus  Dance) 

Contagiosum 

Darien's  Disease 

Dengue  Fever 

Diphtheria 

Eczema 

Elephantiasis 

(due     to     filiari     san- 
guinis hominis) 

Epilepsy 

Felon 

General  Paresis 

Goitre 


Hemophilia 
Hives 
Hordeoluin 
Hydrophobia 
Ichthyosis 
Impetigo  Contagiosa 
Ivy  Poisoning 
Leprosy 
Lichen  Planus 
Lockjaw  (Tetanus) 
Locomotor  Ataxia 
Malignant  Pustule 

(Anthrax) 
Malta  Fever 
Measles 
Molluscum 
Morphea 

Mumps  (Parotitis) 
Mushroom  Poisoning 


Myositis  Ossificans 

Myzedema 

Noma 

Osteomalacia 

Pertussis 

Phlebitis 

Pityriasis  Rubra 

Pneumonia  (lobar) 

Pruritus 

Pseudo  Hypertrophic 

Paralysis 
Psoriasis 

Purpura  Hemorrhagica 
Rhinoscleroma 
Rothein 
Rubella 
Scabies 
Scarlatina 
Scarlet  Fever 


Shingles  (Herpes Zoster) 

Scleroderma 

Scurvy 

Small  Pox 

Spinal  Meningitis 

Tape  Worm 

Trachoma 

Trichinosis 

Typhoid  Fever 

Typhus  Fever 

Vaccinia  Fever 

Varicella 

Varioloid 

Verruca 

Von  Recklinghausen's 

Disease 
Yellow  Fever 
Yellow  Jaundice 


not  including  their  complications  And  consequences,  provided  tlaat  ^"his  insurance  shall  have  been  in  continuous  force  for  thirty  days  from  its  date 
prior  to  the  contraction  of  the  disease,  the  Company  will  pay  ^or  such  confinement  alter  the  first  seven  days  and  not  exceeding  ten  weeks  a 
weekly  indemnity  of  TWENTY-FIVE  DOLLARS  ($25.00). 

PART  X. 

EMERGENCY  BfeNEFIT— REGISTRATION,  IDENTIFICATION  AND  FINANCIAL  AID 

The  Company  will  register  the  person  insured  hereunder  and  if  he  shall  by  reason  of  such  injuries  or  sickness  be  physically  unable  to  commn- 
olcate  with  friends,  will,  upon  receipt  of  a  message  giving  this  Policy  Number,  the  number  of  the  Key  Tag,  or  the  number  on  the  card  in  the  card  case, 
■which  are  famished  with  this  Policy,  immediately  transmit  to  such  relatives  or  friends  as  may  be  known  to  it.  any  information  respecting  him.  aod 
will  defray  any  expenses  necessary  to  put  him  in  communication  with  and  in  the  care  of  friends,  not  exceeding^ 

ONE  HUNDRED  DOLLARS 


APPENDIX  393 

XVI— Continued 
GENERAL  PROVISIONS 

The  loss  of  any  member  or  members  specified  herein  shall  mean  the  loss  by  actual  and  complete  severance  at  or  above  the  wrist  or  ankle;  loss  of 
tyt  or  eyes  shall  mean  the  irrecoverable  loss  of  the  entire  sight  thereof. 

This  Policy  may  be  renewed  by  the  payment  of  annual  premiums  in  advance,  and  a  receipt  signed  by  the  Secreury  and  countersigned  by  a  licensed 
agent  of  the  Company  shall  be  the  only  evidence  binding  upon  the  Company  of  the  payment  of  a  renewal  premium. 

I  This  insurance  does  not  cover  (1)  an  employee  of  a  common  carrier,  news  company  or  the  Government,  while  on  duty,  excepting  only  em- 
ployees whose  duties  call  them  solely  in  the  office  and  away  from  track,  train,  yard,  roundhouse  and  repair  shop;  (2)  while  in  or  on  a  balloon  or  other 
aerial  machine  or  conveyance;  (3)  miners  while  at  work;  (4)  suicide  or  an  attempt  thereat  while  sane  or  insane;  (5)  while  intoxicated  or  under  the 
influence  of  or  affected  by  or  resulting  directly  or  indirectly  from  intoxicants  or  narcotics,  anaesthetics,  gas,  corrosives,  poison,  infec- 
tion, or  poisonous  substances  except  provided  in  Clause  10  of  Part  III;  (6)  while  riding  or  driving  in  races  or  sustained  by  professional  motorcycle 
or  bicycle  riders;  {?)  the  result  of  the  intentional  att  of  the  Insured  or  any  other  person,  except  as  provided  by  Clause  8  of  Part  III;  (8)  any  loss 
contributed  to  or  caused  by  any  mental  or  bodily  infirmity  or  venereal  disease,  vertigo  or  exposure  to  unnecessary  danger;  (9)  while  violating  law; 
(10)  while  walking  over  or  on  the  roadbed  or  bridge  of  any  railway,  except  while  crossing  at  a  public  street  or  highway;  (11)  injuries,  fatal  or 
non-fatal,  except  drowning,  of  which  there  shall  be  no  visible  mark  or  contusion  on  exterior  of  the  body  at  the  place  of  injury,  the  body  iuelf  in  ca^e 
of  death  not  to  be  deemed  such  (12)  while  engaged  in  military  or  naval  seri-ice;  (U)  while  engaged  in  playing  football  or  handling  explosives  or 
firearms;  (14)  sickness  contracted  prior  to  the  date  of  this  policy  or  from  any  disease  or  sickness  not  named  in  the  policy,  or  complicated  with 
•  disease  not  specifically  covered  by  this  policy,  or  (15)  unless  sustained  in  the  United' States,  Canada,  Europe  or  Mexico. 

No  recovery  may  be  had  under  more  than  one  of  the  provisions  hereof  and  in  no  event  shall  th«  Company  be  liable  under  Part  I  for  more  than 
one  of  the  specific  losses  named  therein,  and  any  payment  hereunder,  other  than  for  weekly  Indemnity,  or  as  provided  by  Parts  IV,  VI,  VII,  VIII, 
or  X,  shall  terminate  this  policy.  No  assignment  of  this  policy  or  change  of  beneficiary  shall  be  valid  unless  approved  by  an.  executive  officer  of  the 
Company  end  an  endorsement  shall  be  made  hereon  as  provided  by  Standard  Provision  Number  2. 

Strict  compliance  on  the  part  of  Insured  and  Beneficiary  with  all  provisions  of  this  Policy  is  a  condition  precedent  to  recovery  hereunder,  and 
•ny  failure  in  this  respect  shall  forfeit  to  the  Company  all  right  to  any  indemnity. 

Between  the  ages  of  sixty  and  seventy  all  benefits  hereunder  shall  be  reduced  one-third. 

No  provision  of  the  charter  or  b^-laws  of  the  Company  not  incorporated  in  full  herein  shall  avoid  the  Policy  or  be  used  in  evidence  in  an^ 
tegal  proceeding.  The  Authority  of  the  General  Agents  or  Special  Agents  of  this  Company,  including  the  Agent  issuing  or  countersigning  this 
Policy,  is  limited  to  securing  applications  for  personal  Accident  and  Health  Insurance,  and  to  the  execution  or  countersigning  of  the  same,  wher« 
written  authority  is  given  therefore,  and  for  the  collection  of  premiums  upon  such  executed  policies.  The  authority  of  all  attorneys  in  fact  for  thi» 
Company  is  limited  to  the  acts  to  be  performed  as  set  forth  in  the  Power  of  Attorney  appointing  such  Attorney-in-Fact.  This  Section  relates  to 
and  limits  the  authority  and  power  of  every  Agent  and  other  representative  of  this  Company  in  the  manner  set  forth  in  this  paragraph. 

STANDARD  PROVISIONS 

1.  This  Policy  includes  the  endorsements  and  attached  papers,  if  any,  and  contains  the  entire  contract  of  insurance.  No  reduction  shall  be 
made  in  any  indemnity  herein  provided  by  reason  of  change  in  the  occupation  of  the  Insured  or  by  reason  of  his  doing  any  act  or  thing  pertaining 
to  any  other  occupation. 

2.  No  statement  made  by  the  applicant  for  insurance  not  included  herein  shall  avoid  the  Policy  or  be  used  in  any  legal  proceeding  hereunder. 
No  agent  has  authority  to  change  this  Policy  or  to  waive  any  of  its  provisions.  No  chahge  in  this  Policy  shall  be  valid  unless  approved  by  an 
executive  officer  of  the  Company  and  such  approval  be  endorsed  hereon. 

3.  If  default  be  made  in  the  payment  of  the  agreed  premium  for  this  Policy,  the  subsequent  acceptance  of  a  premium  by  the  Company  or  by 
any  of  its  duly  authorized  agents  shall  reinstate  the  Policy,  but  only  to  cover  accidental  injury  thereafter  sustained  and  such  sickness  as  may  begin 
more  than  ten  days  after  the  date  of  such  acceptance. 

4.  Written  notice  of  injury  or  of  sickness  on  which  claim  may  be  based  must  be  given  l!o  the  Company  within  twenty  days  after  the  date  of 
the  accident  causing  such  injury  or  within  ten  days  after  the  commencement  of  disability  from  such  sickness.  In  event  of  accidental  death 
immediate  notice  thereof  must  be  given  to  the  Company. 

5.  Such  notice  given  by  or  in  behalf  of  the  Insured  or  beneficiary,  as  the  case  may  be,  to  the  Company  at  Philadelphia,  Penna.,  or  to  any 
authorized  agent  of  the  Company,  with  particulars  sufficient  to  identify  the  Insured,  shall  be  deemed  to  be  notice  to  the  Company.  Failure  to  give 
notice  within  the  time  provided  in  this  policy  shall  not  invalidate  any  claim  if  it  shall  be  shown  not  to  have  been  reasonably  possible  to  give  such 
dotice  and  that  notice  was  given  as  soon  as  was  reasonably  possible. 

6.  The  Company  upon  receipt  of  such  notice  will  furnish  to  the  claimant  such  forms  as  are  usually  furnished  by  it  for  filing  proofs  of  loss.  If 
Such  forms  are  not  so  furnished  within  fifteen  days  after  the  receipt  of  such  notice,  the  claimant  shall  be  deemed  to  have  complied  with  the  require- 
ments of  this  Policy  as  to  proof  of  loss  upon  submitting  within  the  time  fixed  in  the  Policy  for  filing  proofs  of  loss,  written  proof  covering  the 
occurrence,  character  and  extent  of  the  loss  for  which  claim  is  made. 

7.  Affirmative  proof  of  loss  must  be  furnished  to  the  Company  at  its  said  office  in  case  of  claim  for  loss  of  time  from  disability  within  ninety 
days  after  the  termination  ol  the  period  for  which  the  Company  is  liable,  and  in  case  of  claim  for  any  other  loss,  within  ninety  days  after  the  date 
cf  such  loss. 

8.  The  Company  shall  have  the  right  and  opportunity  to  examine  the  person  of  the  Insured  when  and  so  often  as  it  may  reasonably  require 
during  the  pendency  of  claim  hereunder,  and  also  the  right  and  opportunity  to  maice  an  autopsy  in  case  of  death  where  it  is  not  forbidden  by  law. 

9.    Ail  indemnities  provided  in  this  policy  for  loss  other  than  that  of  time  on  account  of  disability  will  be  paid  immediately  after  receipt, 

cldue  proof.  4 

10.    Upon  request  of  the  Insured  and  subject  to  due  proof  of  loss  all  accrued  indemnity  for  loss  of  time  on  account  of  disability  will  be  paid' 

at  the  expiration  of  each  thirty  days  during  the  continuance  of  the  period  for  which  the  Company  is  liable,  and  any  balance  remaining  unpaid  at' 

the  termination  of  such  period  will  be  paid  immediately  upon  receipt  of  due  proof. 

,         II.    Indemnity  for  loss  of  life  of  the  Insured  is  payable  to  the  beneficiary  if  surviving  the  Insured,  and  otherwise  to  the  estate  of  thelnsured. 
All  other  indemnities  of  this  Policy  are  payable  to  the  Insured. 

'  •       12.    If  the  Insured  shall  at  any  time  change  his  occupation  to  one  classified  by  the  Company  as  less  hazardous  than  that  stated  in  the  Policy,  the 
Company,  upon  written  request  of  the  Insured  and  surrender  of  the  Policy,will  cancel  the  same  and  will  return  to  the  Insured  the  unearned  premium. 

13.  Consent  of  the  beneficiary  shall  not  be  requisite  to  surrender  or  assignment  of  this  policy,  or  to  change  of  beneficiary,  or  to  any  other 
changes  in  the  Policy. 

14.  No  action  at  law  or  in  equity  shall  be  brought  to  recover  on  this  Policy  prior  to  the  expiration  of  sixty  days  after  proof  of  loss  has  been 
filed  in  accordance  with  the  requirements  ol  this  Policy,  nor  shall  such  action  be  brought  at  all  unless  brought  within  two  years  from  the  expiration 
of  the  time  within  which  proof  of  loss  is  required  by  the  Policy. 

15.  If  any  time  limitation  of  this  policy  with  respect  to  giving  notice  of  claim  or  furnishing  proof  of  loss  is  less  than  that  permitted  by  the  law 
of  the  state  in  which  the  insured  resides  at  the  time  this  policy  is  issued,  such  limitation  is  hereby  extended  to  agree  with  the  minimum  period  penoit* 
ted  by  such  law. 

16.  The  Company  may  cancel  this  policy  at  any  time  by  written  notice  delivered  to  the  insured  or  mailed  to  his  last  address,  as  shown  by  the 
records  of  the  Company,  together  with  cash  or  the  Company's  check  for  the  unearned  portion  of  the  premiums  actually  paid  by  the  insured,  and  such 
cancellation  shall  be  without  prejudice  to  any  claim  originating  prior  thereto. 

17.  If  the  Insured  shall  carry  with  another  company,  corporation,  association  or  society  other  insurance  covering  the  same  loss  without  giving 
written  notice  to  the  Company,  then  in  that  case  the  Company  shall  be  liable  only  for  such  portion  of  the  indemnity  promised  as  the  said  indemnity 
bears  to  the  total  amount  of  like  indemnity  in  all  policies  covering  such  loss,  and  for  the  return  of  such  part  of  the  premium  paid  as  shall  exceed  the 
pro  rata  for  the  indemnity  thus  determined. 

20.  The  insurance  under  this  policy  shall  not  cover  any  person  under  the  age  of  sixteen  years  nor  over  the  age  of  seventy  years.  Any  premium 
paid  to  this  Company  for  any  period  not  covered  by  this  policy  will  be  returned  upon  request. 

3n  Hilttraa  131|rrP0f  the  casualty  company  has  caused  this  policy  to  be  signed  by  its  President  and  Secre. 

tary  in  the  City  of  ,  Penna.,  but  the  same  shall  not  be  binding  on  the  Company  until  signed  by  its  authorized  A^eat. 


Not  valid  if  issued  or  dated  after 

Dated  this -, day  of. 

Countersigned  by ,,,,.. Licensed  Agent  at... 


394    INSURANCE  PRINCIPLES  AND  PRACTICES 

XVI— Continued 
COPY  OF  APPLICATION 

f  hereby  apply  for  Limited  Accident  and  Sickness  Insurance  in  tlie  Casully 

Company  to  be  basefl  upon  the  following  representation  oT  facts: 


What  is  your  name*                                                                Age? 

Race? 

What  is  your  weight?                       Jbs.    and  Height? 

feet 

Inches. 

Where  do  you  reside?    No. 

Street 

Town                                                                           State 

What  is  your  occupation? 

To  whom  is  Policy  to  be  payahle  in  case  of  death  under  its  provisions? 

Full  name  Relationship 

Residence  Age 

Have  you  ever  had  fits,  diabetes,  kidney  disease,  syphilis,  Iieart  disease,  hernia  or  any  disease  of  the 
nervous  system? 

Have  you  lost  a  hand,  foot  or  eye  or  the  use  of  either? 

Are  you  in  whole  and  sound  condition? 

Have  you  had  medical  attendance  within  the  past  twelve  months? 


Have  you  any  insurance  in  this  Company? 


Are  you  now  carrying  or  have  you  applied  for  any  other  Accident  or  Health  Insurance? 

Has  any  application  ever  made  by  you  been  declined,  or  has  any  policy  issued  to  you  been  cancelled 
or  renewal  refused  by  any  Life,  Accident  or  Health  Insurance  Association,  Company  or  Society? 

Dated  at. this day  of .19.  ^ . ,* 

Signed .....a 


In  the  event  of  any  acxident  or  any  sickness  full  particulars 
should  be  given  inunediately  to  the  Compemy  at 
Penna.     It  is  not  necessary  for  the  insured  or  the  Beneficiary  to 
omploy  any  person  to  collect  any  indemnity  provided  in  this  policy. 


APPENDIX  395 

XVII 

ACCIDENT  AND   HEALTH  POLICY 

Form  XHD.    This  Policy  provides  for  loss  of  Life,  Limb,  Sight  and  Time,  caused  by  accidental 

bodily  injuries  effected  through  external  violence,  and  for  disability  caused  by 

disease,  to  the  extent  herein  provided* 

THE 


Insurance  Company 

Does  Hereby  Insure 


under  cUisificaiion. -„, , , ■ —by  occupation  • 

against  loss  resulting  from  Bodily  Injuries,  effected  directly  and  independently  of  all  other  causes,  through  External.  Violent  and  Accidental  means 
(Suicide,  sane  or  insane  is  not  covered),  and  against  disability  by  Disease,  as  specified  in  the  following  Schedules,  respectively,  subject  (0  tho 
proviftioiu  and  limitations  hereinafter  contained. 

Schedule  of  Indemnities — Accident  Insurance 

rW  Principal  Sam  <^  this  Policy  U  $ 

f>«irt  A.  Death,  Dismemberment  and  Loss  of  Sight — Single  Indemnity 

If  such  injuries  shall  wholly  and  continuously  disable  the  Insured  from  the  date  of  accident  from  performing  any  and  every  kind  of  duty  per- 
taining to  his  6ccupation,  and  during  the  period  of  sudi  continuous  disability,  but  within  two  hundred  weeks  from  date  of  accident,  ehall  result 
independently  and  exclusively  of  all  other  causes  in  any  one  of  the  Josses  enumerated  in  this  part,  or  within  ninety  days  from  the  date  of  the 
accident,  irrespective  of  total  disability,  result  in  like  manner  in  any  one  of  such  losses,  the  Company  will  pay  the  sum  set  opposite  such  loss  and 
in  addition  weekly  indemnity  as  provide<l  in  Part  B  to  the  date  of  death,  dismemberment,  or  loss  of  sight;  but  only  one  of  the  amounifl  eg  8pe^» 
fied  and  the  additional  weekly  indemaity  will  be  paid  for  injuries  resulting  from  one  accident. 

FOR  LOSS  OP 

Life                                                               ........  The  Pftnclpat  Sum 

Both  Hands  or  Both  Fed  or  Sight  c/  Botlt  Eya           ,                .                         .       •        .  TAc  Ptlncipal  Sum 

One  Htmd  and  One  Foot                   ,         .                   .         •  The  Principal  San 

Either  Hand  or  Foot  ar»f  Sight  of  One  Eyt                     .                    The  Principe!  Sum 

Either  Hand  or  Foc4                ...                   •                    1-2  Principal  Sum 

Sight  of  One  Eye                                              .           .                                                                ...  t -3  Principal  Sum 

Thumi  and  Index  Finger  of  Eithet  Hand                                                 ,         ,         ^        ,         .  1-4  Principal  Sum 

Loss  shall  mean,  with  regard  to  hands  and  feet,  dismemberment  by  severance  at  or  above  wrist  or  ankle  joints;  with 
regard  (o  eyes,  entire  and  irrecoverable  loss  of  sight;  with  regard  to  thumb  and  index  finger,  severance  at  or  above  meta* 
carpo-phalangeal  joiat&. 

The  Payment  in  any  such  com  diall  tnd  this  Policy. 

Or,  in  the  event  of  the  loss  of  both  hands,  or  both  feet,  or  the  sight  of  both  eyes,  covered  and  defined  as  above,  if  the 
Insured  shall  so  elect  in  writing,  the  Company  will  pay  in  lieu  of  the  specific  indemnity  enufoerated  above,  weekly  indem- 
rity  at  the  rate  prescribed  in  part  B  for  total  disability  so  long  as  the  Insured  shall  live. 

Instalment  Option  to  BcReHciary 

In  case  of  valid  claim  for  death  under  this  Policy,  the  Beneficiary  may  elect  to  have  it  paid  in  roonthiy  iiutalmcnts  «9  follows,  (of  cacb  $t,000: 
First  instalment  to  be  paid  immediately  after  receipt  of  due  proof  of  claim. 

60  Monthly  Instalments  Certain  of  $18.19 
or,  120  Monthly  Instalments  Ceruin  of      9.86 
or.  180  Monthly  Instalments  Certain  of      7.14 
or,  240  Monthly  Instalments  Certain  of      5.78 
Upon  the  written  rw^uest  of  the  Beneficiary  at  any  time  before  aU  of  the  instalments  elected  hereunder  shall  have  been  paid,  or  upon  the  like 
request  of  her  executor  or  administrator  if  she  &hall  die  before  receiving  all  of  such  instalments,  the  then  present  value  of  the  remainder  thereof 
computed  at  three  and  one-half  per  cent,  interest  will  be  paid  in  one  sum  to  the  Beneliciary  or  to  her  executor  or  administrator,  as  the  case  may  be. 


Total  and  Partial  Disability — Single  Indemnity 


Rart  B. 

Total  Lou  Or,  if  such  injuries,  independently  and  exclusively  of  all  other  causes,  shall  wholly  and  continuously  disable  the  In- 

,  y  sured  from  the  date  of  accident  from  performing  any  and  every  kind^of  duty  pertaining  to  his  occupation,  the  Company 

^     ""*  Will  pay,  so  long  as  the  Insured  lives  and  suffers  such.toul  disability,  a  weekly  indemnity  of  • 

Portiol  Lou  Or.  if  such  injuries, independently  and  exclusively  of  all  other^causes.  shall  wholly  and  continuously  disable  the 

f  j^^  Insured  from  date  of  accident  from  performing  one  or  more  important  daily  duties  pertaining  to  his  occupation,  or 

*  for  like  continuous  disability  following  total  loss  of  time,  the  Company  will  pay  during  the  period  of  such  disability, 

but  not  exceeding  twenty-six  consecutive  weeks,  a  weekly  indemnity  (one-half  of  rate  for  total  loss  of  time)  of  • 

No  payment  of  weekly  indemnity  shall  be  made  m  ca&e  of  any  loss  enumerated  in  Part  A*  except  as  therein  provide<i. 


Double  Indenmity' 


Parte 

If  such  injuries  are  sustained  (I)  while  a  passenger  in  or  on  a  public  conveyance  provided  by  a  common  carrier  for  passenger  service  (includ- 
ing the  platform,  steps  or  running-board  of  railway  or  street  railway  cars) ;  or  (2)  while  a  passenger  in  a  passenger  elevator  (excluding  elevators  in 
mines);  or  are  earned  (3)  by  the  burning  of  a  building  provided  the  Insured  is  therein  at  the  commencement  of  the  fire;  or  by  the  cotbpse  of 
lh«  outer  walls  of  a  building  while  the  Insured  is  therein;  or,  (4)  by  a  stroke  of  lightning;  or,  (S)  by  the  explosion  of  a  ste^m  boilcfi  or,  (6J  by 
a  cyclone  or  by  a  tornado;  tht  Company  unli  pay  Douitk  the  amount  oiherwue  payable  under  Pari  A  or  B  of  this  Policy, 


PartT>. 


Elective  Benefits 


The  Insured,  if  he  so  elect  m  writing  within  twenty  days  from  date  of  accident,  may  taSe,  in  lieu  of  the  weekly  indemnity  hereinbefore  pro* 
vided  for  total  and  partial  disability,  indemnity  in  one  sum,  according  to  the  following  Scb^ule,  if  the  injury  is  one  set  forth  in  such  Schedule, 
but  not  more  than  one  Elective  iKneHt  &h.ill  be  paid  for  injuries  resulting  from  ooe  accident.  When  Che  Insured  is  entitled  to  double  indemnity 
the  Elective  indemnity  shall  be  doubled  in  like  manner. 


396    INSURANCE  PRINCIPLES  AND  PRACTICES 

XVU— Continued 
ACCIDENT  AND  HEALTH  POLICY 

Schedule  of  Elective  Benefits 

If  the  (ingle  weeldy  indemnity  for  total  loss  of  time  payable  under  this  Policy  is  $50.00.  the  amounts  named  below  shall  be  payable:  if  such  weekly  indemniiy 

is  greater  or  less  than  $50.00,  the  amounts  to  be  paid  shall  be  increased  or  reduced  proportionately. 

FOR  LOSS  FOR  THE  COMPLETE  FI^CTURE  OF  BONES 

Of  one  or  more  Fingers  (at  least  one  entire  phalanx)  $300                         Of  the  Skull,  both  tables ,  $650 

Of  one  or  more  entire  Toes               "  40O                         Of  the  Lower  Jaw ...  150 

Of  the  Collar  Bone   '.     .     .- 300 

Of  the  Pelvis 500 

FOR  COMPLETE  DISLOCATION                                                                   Of  the  Thigh ,     ,  600 

Of  the  Shoulder 200                         Of  the  Leg 400 

Of  the  Elbow 200                         Of  the  Knee  Cap                  400 

Of  the  Wrist 250  Of  the  Arm.  between  Elbow  and  Shoulder      .  600 

Of  the  Hip 600  Of  the  Forearm,  between  Wrist  and  Elbow    .     ,     .  300 

Of  the  Knee 300                         Of  two  or  more  Ribs 20O 

Of  any  Bones  of  Foot,  other  than  Toes      ....  300                          Of  the  Foot,  other  than  Toes -250 

Of  the  Ankle 300                         Of  the  Hand,  other  than  Fingers 250 

Of  MO  or  more  Toes        . 100                           Of  two  or  more  Toes             200 

Of  two  or  more  Fingers        100                         Of  two  or  more  Fingers  .  "            20O 

Schedule  of  Indemnities — Health  Insurance 

Part  &  ^ 

(1)  For  the  period  of  continuous  disability  during  which  the  Insured  shall,  independently  of  a!I  other  causes,  be  wholly  disabled 
Tanporarg            and  prevented  by  bodily  disease,  not  hereinafter  excepted,  from  performing  any  and  every  kind  of  duty  pertaining  to  his  occupation, 

Disahiiitu  *^^  Company  will  pay  a  weekly  indemnity  of  $ ;  and  if  following  such  a  period  of  total  disability,  he  shall  be 

'  continuously  wholly  disabled  and  prevented  by  bodily  disease,  not  hereinafter  excepted,  from  performing  at  least  half  the  work 

essential  to  the  duties  of  his  occupation,  the  Company  will  pay  during  the  period  of  such  partial  disability,  a  weekly  indemnity 
of  one-half  of  the  weekly  amount  provided  for  total  disability;  but  no  payment  shall  be  made  for  disability  of  cither  or  both 
kinds  in  excess  of  fifty-two  consecutive  weeks'  duration. 

(2)  If  the  Insured  shall  suffer  the  entire  and  irrecoverable  loss  of  the  use  of  both  hands  or  both  feet,  or  of  one  hand  and  one 
Permanent            foot,  or  the  sight  of  both  eyes,  as  the  result  of  such  disease  the  Company  will  continue  to  pay  him  in  lieu  of  all  other  indem* 

DisohilUy  nity,  except  for  surgical  or  hospital  I.idemnity,  the  weekly  indemnity  specified  in  Section  1  of  this  Part  during  such  period  as  the 

Insured  shall  independently  of  all  other  causes  be  thereby  wholly  and  continuously  disabled  and  prevented  from  engaging  in  any 
occupation  or  employment  for  wage  or  profit,  but  no  payment  under  this  Section  2  shall  be  made  (or  any  period  of  disability  in 
excess  of  one  hundred  (100)  weeks. 

The  Payment  jor  Permanent  Disability  shall  end  this  Policy. 

No  payment  shall  be  made  for  disability  resulting  from  any  disease  for  which  the  Insured  is  not  treated  by  a  physician  or  from  disease  beginning  within 
fifteen  days  from  noon  of  the  date  oi  this  Policy- 


Surgical  Benefits — ^Accident  and  Health  Insurance 


If  an  operat-ion  named  in  the  Schedule  of  Operations  which  forms  a  part  of  this  Policy  shall  be  performed  by  a  surgeon  on  account  of  a  bodily  injury  or 
disease  covered  by  this  Policy  and  within  ninety  days  from  the  date  of  accident  or  commencement  of  such  disease,  the  Company  will  pay  the  sur- 
gical benefit  specified  in  the  Schedule  for  such  operation  in  addition  to  any  other  indemnity  to  which  the  Insured  may  be  entitled.  If  more  than  one  such 
operation  shall  be  performed  on  account  of  injury  sustained  in  one  accident  or  on  account  of  one  illness  the  Insured  shall  receive  the  largest  surgical  benefit 
specified  in  the  Schedule  for  any  one  of  the  operations  so  performed.  If  an  accidental  bodily  injury  shall  be  sustained  which  shall  not  result  in  death  or  other 
disability,  oi  necessitate  an  operation  named  in  the  Schedule,  but  which  shall  require  surgical  treatment  the  Company  will  pay  the  amount  actually  expended 
for  such  treatment,  but  not  exceeding  the  amount  of  the  single  indemnity  hereunder  for  total  loss  of  time  for  one  week. 

parto.  Hospital  Indemnity — Accident  and  HecJth  Insurance 

If  on  account  of  a  bodily  injury  or  illness  for  which  weekly  indemnity  is  payable  under  this  Policy,  the  Insured  shall  be  removed  to  a  hospital  within  ninety 
days  from  thedateof  accident,  or  commencement  of  disability  by  disease,  the  Company  will  pay  50  Pet  Cent,  additional -single  weekly  indemnity  for  the  period 
during  which  he  shaH  be  a  patient  resident  in  the  hospital  but  not  exceedmg  twenty  consecutive  weeks. 


Identification  and  Registration 


Part  M. 

If  the  Insured  by  reason  of  injury  or  illness  shall  be  physically  unable  to  communicate  with  friends,  the  Company,  upon  receipt  of  a  tclegrarn  or  other 
meesage  giving  the  number  of  this  Policy,  will  immediately  transmit  to  his  relatives  or  friends  any  information  respecting  him  and  will  defray  all  expenses 
necessary  to  put  the  Insured  in  the  care  of  friends,  provided  such  expense  shall  not  exceed  the  sum  of  One  Hundred  Dollars. 

Standard  Provisions 

1.  This  Policy  includes  the  endorsements  and  attached  papers,  if  any,  and  contains  the  entire  contract  of  insurance  except  as  ft  may  be  modified  by  the 
Company's  classification  of  risks  and  premium  rates  in  the  event  tliat  the  Insured  is  injured  after  having  changed  his  occupation  to  one  classified  by  the  Com- 
pany as  more  hazardous  than  that  stated  in  the  Policy,  or  while  he  is  doing  any  act  or  thing  pertaining  to  any  occupation  so  classified,  except  ordinary  duties 
about  his  residence  or  while  engaged  in  recreation,  in  which  event  the  Company  will  pay  only  such  portion  of  the  indemnities  provided  in  the  Policy  as  the 
premium  paid  would  have  purchased  at  the  rate  but  within  the  limits  so  hxed  by  the  Company  for  such  more  hazardous  occupation. 

If  the  law  of  the  State  in  which  the  Insured  resides  at  the  time  this  Policy  is  issued  requires  that  prior  to  its  issue  a  statement  of  the  premium  rates 
and  clii.>sification  of  risks  pertaining  to  it  shall  be  filed  with  the  state  official  having  supervision  of  insurance  in  such  state,  then  the  premium  rates  and  classifi- 
cation of  risks  mentioned  in  this  Policy  shall  mean  only  such  as  have  been  last  filed  by  the  Company  in  accordance  with  such  law,  but  if  such  fiUng  is  not  required 
by  such  law  then  they  shall  mean  the  Company's  premium  rates  and  classification  of  risks  last  made  effective  by  it  in  such  state  prior  to  the  occurrence  of  the 
loss  for  which  the  Company  is  liable. 

2.  No  statement  made  by  the  applicant  for  insurance  not  included  herein  shall  avoid  the  Policy  or  be  used  m  any  legal  proceeding  hereunder  No  agent 
has  authority  to  change  this  Policy  or  to  waive  any  of  its  provisions.  No  change  in  this  Policy  shall  be  valid  unless  approved  by  an  executive  officer  of  the 
Company  and  such  approval  be  endorsed  hereon. 

3.  If  default  be  made  in  the  payment  of  the  agreed  premium  for  this  Policy,  the  subsequent  acceptance  ol  a  premium  by  the  Company  or  by  any  of  its 
duly  authorized  agents  shall  reinstate  the  Policy  but  only  to  cover  accidental  injury  thereafter  sustained  and  such  sickness  as  may  begin  more  than  ten  days 
after  the  date  of  such  acceptance. 

4.  Written  notice  of  injury  or  of  sickness  on  which  claim  may  be  based  must  be  given  to  the  Company  within  twenty  days  after  the  date  of  the  accident 
causing  such  injury  or  within  ten  days  after  the  commencement  of  disabihty  from  such  sickness.  In  event  of  accidental  death  immediate  notice  thereof  must 
be  given  to  the  Company. 

5.  Such  notice  given  by  or  in  behalf  of  the  Insured  or  Beneficiary,  as  the  case  may  be,  to  the  Company  jt  ^,  or  to 
any  authorized  agent  of  the  Company,  with  particulars  sufficient  to  identify  the  Insured,  shall  be  deemed  to  be  notice  to  the  Company  Failure  to  give  notice 
within  the  time  provided  in  this  Policy  shall  not  invalidate  any  claim  if  it  shall  be  shown  not  to  have  be-en  reasonably  possible  to  give  such  notice  and  that 
notice  was  given  as  soon  as  was  reasonably  possible. 

6.  The  Company  upon  receipt  of  such  notice,  will  furnish  to  the  claimant  such  forms  as  are  usually  furnished  by  it  for  filing  proofs  of  loss.  If  such  forms 
are  not  so  furnished  within  fifteen  days  alter  the  receipt  of  such  notice,  the  cl.iimant  shall  be  <lccmcd  to  have  complied  with  the  requirements  of  this  Policy  as 
lo  proof  of  loss  upon  submitting  within  the  time  fixed  in  the  Policy  for  filing  proofs  of  loss,  written  proof  covering  the  occurrence,  character  and  extent  of  the  lo6& 
for  which  claim  is  made. 

7.  Affirmative  proof  of  loss  must  be  furnished  to  the  Company  at  its  said  office  in  case  of  claim  for  loss  of  lime  from  disability  within  ninety  days  after 
the  termination  of  the  period  for  which  the  Company  is  liable,  and  in  case  of  claim  for  any  other  loss,  within  ninety  days  aftur  the  dale  of  such  loss. 

8.  The  Company  shall  have  the  right  and  opportunity  to  examine  the  person  of  the  Insured  when  and  so  oftoi  as  it  may  reasonably  require  during  th« 
pendency  of  claim  hereunder,  and  also  the  right  and  opportunity  to  make  an  autopsy  in  case  of  death  where  it  is  not  forbidden  by  law. 

9.  All  indemnities  provided  in  this  Policy  for  loss  other  than  that  of  lime  on  account  of  disability  will  be  paid  immediately  after  receipt  of  due  proof. 

10.  Upon  request  of  the  Insured  and  subject  to  due  proof  of  loss  all  accrued  indemnity  for  loss  of  time  on  account  of  disability  will  be  paid  at  the  expira- 
tion of  each  four  weeks  during  the  continuance  of  the  per;od  for  which  the  Company  in  liable,  and  any  balance  remaining  unpaiti  at  the  terrmnation  of  such 
period  will  be  paid  immediately  upon  receipt  of  due  proof. 


APPENDIX  397 

XVll— Continued 

II.  Indemnity  for  loss  of  life  of  the  Insured  is  payable  to  the  Benefidary  if  6urv!vlng  the  Insured,  and  ot!ierw?»e  to  the  estate  of  the  Insured.  All  other 
indemnities  ot  this  Policy  are  payable  to  the  Insured.  ...„,.         ._ 

12  If  the  Insured  shall  at  any  time  change  his  occupation  toone  clas,sifi«d  by  the  Company  as  less  hazard.jus  than  that  stated  in  the  Policy,  the  Company. 
upon  written  request  of  the  Insured  and  surrender  of  the  Policy,  will  cancel  the  same  and  will  return  to  the  Insured  the  unearned  premium. 

13.  Consent  of  the  Beneficiary  shall  not  be  requisite  to  surrender  or  assignment  of  this  Policy,  or  to  change  of  beneficiary,  or  to  any  other  changes  in  the 
Policy. 

M  No  action  at  law  or  in  equity  shall  be  brought  to  recover  on  this  Policy  prior  to  the  expiration  of  sixty  days  after  proof  of  loss  has  been  filed  in  accord- 
anca  with  the  requirements  of  this  Policy,  nor  shall  such  action  be  brought  at  all  unless  brought  within  two  ytars  from  the  expiration  of  the  time  within  which 
proof  of  loss  is  required  by  the  Policy.  ^ 

15  If  any  time  limitation  of  this  Policy  with  respect  to  givinc  notice  of  claim  or  furnishing  proof  of  loss  is  less  than  that  permitted  by  the  law  of  the  state 
in  which  the  Insured  resides  at  the  time  this  Policy  is  issued,  such  limiution  is  hereby  extended  to  agree  with  the  minimum  period  permitted  by  such  law. 

16  The  Company  may  cancel  this  Policy  at  any  time  by  written  notice  delivered  to  the  Insured  or  mailed  to  his  last  address  as  shown  by  the  records  of 
the  Company,  together  with  cash  or  the  Company's  check  for  the  unearned  portion  ol  the  premiums  actually  paid  by  the  Insured,  and  such  cancelation  shall  be 
without  prejudice  to  any  claim  originating  prior  thereto. 

Additioncil  Provisions 

(«  )  The  Insurance  under  Parts  A  to  D  inclusive,  shall  not  cover  accident,  injury,  disability,  death  or  other  loss  caused  directly  or  Indirectly,  wholly  or 
partly  by  bodily  or  mental  infirmity,  ptomaines,  bacterial  inlecUons  (except  pyogenic  infections  which  shall  occur  with  and  through  an  accidental  cut  or  wound), 
or  by  any  other  kind  of  disease;  nor  shall  it  cover  any  injury,  fatal  or  non-fatal,  caused  directly  or  indirectly  by  war  or  by  any  act  of  war,  or  sustained  by  tho 
Insured  while  participating  in  or  in  consequence  of  having  participated  in  aeronautics;  nor  shall  it  cover  the  Insured  while  in  military  or  naval  service  in  time 
of  war. 

(b  )  The  insurance  under  Part  E  shall  not  cover  disease  contracted,  or  sickness  or  disability  sustained,  in  the  tropics  or  in  any  part  of  Alaska  or  the  British 
Possessions  in  America,  north  of  the  sixtieth  degree  of  north  latitude;  nor  shall  it  cover  disability  by  disease  while  engaged  in  miUtary  or  naval  service,  nor  thaU 
it  cover  disability  for  any  period  for  which  the  Insured  has  either  made  claim  or  may  become  entitled  to  indemnity  for  or  on  account  of  injuries  by  acci- 
dental violence ;  nor  shall  it  cover  disability  unless  the  disease  is  contracted  and  the  disability  begins  while  the  Policy  is  in  force. 

(c.)     A  copy  of  any  assignment  shall  be  given  within  thirty  (30)  days  to  the  Company  which  shall  not  be  responsible  for  its  validity. 

(d.)    The  copy  of  the  application  endorsed  hereon  is  hereby  made  a  part  of  this  contract  which  is  made  subject  thereto.     No  provision  of  the  charter,  jj 
constitution  or  by-laws  of  the  Company  shall  avoid  the  insurance  hereunder  or  be  used  in  evidence  or  in  defense  of  any  claim  arising  under  this  Policy  O 

(e.)    This  Policy  is  issued  in  consideration  of  the  premium  of_ dollars,  for  the  term  of months, 

to  commence  on  the  day  this  Policy  is  dated  against  a<  cidental  bodily  injuries,  and  for  the  term  ot days  to  commence  on  the 

fifteenth  day  after  the  day  this  Policy  is  dated  against  disability  by  disease  and  bcgioniag  and  ending  in  each  case  at  twelve  o'clock  noon,  sundaid  time  ol  the 

place  where  Insured  resides,  but  it  may  be  renewed  with  the  consent  of  the  Company,  from  term  to  term  of months  each,  by  the  payment 

of  the  aforesaid  premium  in  advance  until  the  Insured  shall  be  fifty-one  years  ol  age.     II  the  Policy  shall  be  renewed  thereafter,  the  renewal  premium  shall 

3ln  JUitncBtf  IJ3f)Cttof  Thb  Insurance  Company  has  caused  this  Policy  to  be  signed  by  its  President  and  a  Secretary,  and  dated  this 

_day  Tif  '"  but  the  same  shall  not  be  binding  upon  the  Company  until  countersiEned  by  a  duly  authorized 


Agent  or  Cashier  of  the  Company. 

SipecSmemi  Cootract  Specimen  Coetract 

Countersigncfj 

Copy  of  Application 

** Application  to  The  Insurance  Company, 


What  19  your  full  name?. 


A.      What  is  your  age? ^ Date  of  birth? ..Place  of  birth? 

D.  Color? - C.     Height? ft „ Jn.    D.    Weight? - -Ibs- 

E.  Where  do  you  reside? ^— * - • • — 

(Street  ud  No.)  (City  or  Town) 

County  of „ * - ^ 5tateof , . . 

F.  Are  you  memberof  firm  or  employee?    (Meftibcrof  firm)    (Employee) , 


(SUtCQUDCof  fLrmsDcl  butlDt9icag9LsedUi> 

Located  at _.„ _ _ Street,  Town  of State  of_. 

G.      State  fully  your  occupation — position,  nature  of  business  engaged  in  andthe  duties  performed? 


•H.    To  whom  shall  Policy  J      Name _ JVddresa .' 

^  P^^^deatir?  *^^  "*'  {     ^^e Height ft io.     Weight lbs. 

What  IS  relationship  of  the  beneficiary  to  you? , „ - ■  - 

I.        Do  your  average  weekly  earnings  exceed  the  aggregate  single  weekly  indemnity  payable  under  this  Policy  and  all  other  similar  pcttcies  now  carried  by  you? 

J.       What  life,  accident  or  health  insurance  have  you  in  this  Company? _ — . 

What  accident  or  health  insurance  have  you  in  other  companies  or  associations? . ., .- ■ — — 


Have  you  ever  received  indemnity  for  any  injury  or  illness? „ 

K.      Have  you  ever  been  declined  or  postponed  for  life,  accident  or  health  insurance?.. 


Have  you  ever  made  application  for  life,  accident  or  health  insurance  upon  which  you  have  not  been  notified  of  the  action  thereon?._.„ — — ^ 

Has  any  life,  accident  or  health  policy  issued  to  you  been  canceled  or  has  any  renewal  thereof  been  refused,  by  this  or  any  other  company  or  assodatioa? 


L.       Have  you  in  contemplation  any  special  journey  or  hazardous  undertaking?^ 


Do  you  ever  engage  in  motorcycling  or  aeronautics? . — 

Do  you  own  or  operate  an  automobile? 

M.     Have  any  of  your  relatives  ever  been  insane  or  had  tuberculosis?.- 

N.      Are  your  habits  temperate? „ 

O.      Are  you  maimed  or  deformed?.. 


Is  your  sight  or  hearing  impaired? « 

Have  you  ever  had  a  hernia  or  worn  a  truss?. « — , _ -— 

Have  you  ever  had  any  of  the  following:     Epilepsy? — Syphilis?.- 


Vertlgoor  Dizziness? .* Diabetes? _ — „ Tuberculosis? — 

Mental  disorder?. „ _ Disease  of  Brain  or  Nervous  System?., 

Disease  of  Tonsils,  Nose  or  Throat? „ _ - — ^ 


P.       Have  you  within  the  past  five  years  had  medical  or  surgical  advice  or  treatment  or  any  departures  from  good  health?     If  so,  state  when  and  what,  and 

Of  oaib — Vcu)  (tiaUUK  of  AJImrBi)  (DunUoa  ol  A 


Q.       Have  you  ever  had,  or  ever  been  advised  to  have,  an  of>eration? 


(If  Ajuwcr  li  "Vm".  five  (uU  ttutioiUn) 

R.      Have  you  been  exposed  during  the  last  ten  days  to  any  contagious  or  infectious  disease?^ 


S.        Do  you  agree  that  the  falsity  of  any  answer  in  this  application  for  a  Policy  shall  bar  the  right  to  recover  thereunder  if  such  answer  is  made  with  intent  lo 

deceive  or  materially  affects  either  the  acceptance  of  the  risk  or  the  hazard  assumed  by  the  Company? ^ 

Policy  applied  for  this day  of 19 

•l/Bobe«fittaPDlicTJorIoMo/lilewriU"NodMibbeoefiftoie«l»oH.  Signature  of  Applican*f:^>",  —_— - —  — — » 


398    INSURANCE  PRINCIPLES  AND  PRACTICES 

XVII— Continued 


Schedule  of  Operations — Surgical  Benefits 


If  the  single  weekly  indemnity  for  tout  loss  of  time  payable  under  (his  Poiiry  is  $50  00,  the  amounts  named  below  shall  be  payable.   H  (ucb 
weekly  indemnity  is  greater  or  le«  than  $50.00  the  amounts  to  be  paid  shall  be  increased  or  reduced  proportionately. 


ABSCESS.     Incision 110 

ABDOMEN.    Cutting  into  Abdominal  Cavity  for  diagnosis  or 

treatment  of  organs  therein 200 

AMPUTATION  OF 

Entire  Hand,  Forearm,  or  Foot 51, 

Leg  or  Arm  .           100 

Thigh                 150 

Finger  or  Fingers          .           20 

ANEURISM.    Operation  for  tying  of  Artery 70 

APPENDICITIS.     Abdomen 200 

BONE.     Injuriestoordiseascof.    Removal  of  diseased  portion 

of  bone                                           50 

CANCER  OF  LIP.     Removal  of,  by  cutting  operation      .     .  50 

CARBUNCLE.     Incision                    10 

CHEST.    Cutting  into  thoracic  cavity  for  diagnosis  or  treat- 
ment of  organs  therein        .      .      .      , 50 

DISLOCATION.    Reduction  of 

Hip  or  Knee             70 

Shoulder,  Elbow,  or  Ankle 50 

Wrist  or  Lower  Jaw 30 

Thumb 20 

Fingers                 10 

EYE,  EAR,  NOSE  OR  THROAT.    Any  cutting  operation     .  20 

EYE.    Removal                  100 

EXCISION.    Removal  of 

Shoulder  or  Hip  Joint 200 

Knee  Joint                            ISO 

Elbow,  Wrist,  or  Ankle  Joint 100 

Toe  or  Toes  .                  .*....  M 

l/RACTURES.     Reduction  of 

Nose,  Lower  Jaw,  Collar  Bone,  or  Shouldv  Blade  ...  50 

Breast  Bone  or  Riba     .  ' 20 

Upper  Arm    .      .       •          .            70 

Forearm                          ?..   4^  -«.  i 50 

Wrist        ,../«•«...»■.        ,...,...  SO 
Hand                  ..    ^    ,'.     ^    ,,...<...'    30 

Fingers               .,,,..           .     .     .     .     r     .  10 

Bones  of  the  Pelvis  (except  Coccyx) 150 

Coccyx 20 

rhigh                       ISO 

Knee  Cap  or  Leg          , 100 

Bones  of  Foot          •           ...» 30 

Toes  .                     .     K    .    V    .     , 20 


GOITRE.     Cutting  operation  for  permanent  cure    .      .      .     , 

GUNSHOT  WOUNDS.    Treatment  of,  not  necessitating  am. 

putationor  any  cutting  operation  into  AbdomiQal  Cavity 

HYDROCELE.    Incision  and  treatment  of  Sac      .     .     .     . 

HYDROPHOBIA.     Pasteur  treatment 

INFLAMMATION  OF  JOINT.     Incision  into  Joint    .     .     . 
INTESTINAL  OBSTRUCTION.    See  Abdomen 
KIDNEY.    See  Abdomen 

LOCKJAW.     Injection  of  Antitoxin  into  Skull 

Injection  of  Antitoxin  into  Spinal  Canal 

MASTOIDITIS.    Cutting  operation  for  removal  of  diseased 

bone 

NERVE.     Cutting  operation  for  stretching 

RECTUM.    Operation  for  radical  cure 

Hamiorrhoids,  external 

"  internal       

Prolapsed 

Fistula  in  Ano 


tts» 

M 
50 

lOO 
9» 


200 
lOO 

too 

SO 

30 

50 
50 
40 

Malignant  Stricture 200 

SKULL.    Cutting  into  cranial  cavity 200 

SPINE  OR  SPINAL  CORD.    Operation  with  removal  of  frac- 
tured vertebra    .  20O 

STRICTURE  CESOPHAGUS.    Cutting  operation  (external) 

lor  permanent  cure  of tOO 

STONE  IN  BLADDER.    Removal  of.  by  cutting  or  crushing 

operation       ...« ISO 

TAPPING  OF. 

Abdomen      . SO 

Bladder SO 

Chest 30 

Ear  Drum 20 

Hydrocele p) 

Joints 20 

TRACHEA.    Cutting  into  for  removal  of  foreign  bodies  or  iot 

relief  of  difhcult  breathing 70 

TUMORS.    Removal  of,  by  cutting  operation 

Malignant                                                lOO 

Benign                     30 

VARICOCELE.    Cutting  operation  for  permanent  cure    .     .  SO 

VEINS,  VARICOSE.    Cutting  operation  for  permaaept  cure  SO 

WOUNDS.    Suturing               10 


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APPENDIX 


399 


XVIII 
ACCIDENT  AND  HEALTH  POLICY 

Tim  policy  provides  indemnity  for  los>  of  life  or  time  through  accidental  means, 
and  for  loss  of  time  by  sickness;  to  the  extent  herein  provided. 


THE 


INSURANCE  COMPANY 


(HEREIN  CALLED  COMPANY) 


HEREBY  KSURES 

•nd  JcsulxjJ  in  tlw  Application),  aubject  to  all  proviaiocs  Bud  IsmitatioDa  herein  contained: 


(herein  called  luureJ 


Agarnat  loaa  of  Kfe  resulting  directly  and  independently  of  all  other  catsaea, 
of  thia  policy  aoMy  duongb  accidental  meana;  and 


Againet  dis^ality  commencing  while  thia  policy  is  in  force 
means;  and  against  disability  commencing  while  this  poll* 
cases,  to  be  such  as  will  result  in  continuous  total  loaOibi 


Part  A.     The  Company  will  pay_ 
should  loss  of  life  as  ddSned  above 


Part  B.     The  Compemy  will 
per   month   dining  the   continuanc^^f 
(ul  oco^aabDn,  providedL  however;  that 
first* 


y  injury  effected  during  the  tena 


ng  V^pf  bodily  injury  effected  through  accidental 
^d  resulting  from  sickness;  such  disability,  in  both 
follows: 


DoHan 


hundred  and  twenty  days  from  date-of  the  accident 

Disability 

nity  at  the  rate  of  Dollars 

disability   as  defined  above  until  such  time    as  the  Insured  engages  in  a  gain- 
indemnity  shall  be  paid  urrder  this  Part  B  or  under  Parts  C  D  or  E,  for  the 
of  any  period  of  disability. 


Loss  of  Both  Hands.  Both  Feet,  Hand  and  Foot  or  the  Sight  d  Both  Eyes 

F^rt  G  dboold  the  Insured  suffer,  as  a  direct  result  of  such  injury  or  such  sickness,  the  loss  of  both  entire  hands  by 
complete  severance  at  or  above  the  wrists,  or  the  loss  of  both  entire  feet  by  complete  severance  at  or  above  the  ankles,  or  the 
loss  of  one  entire  hand  by  complete  severance  at  or  above  the  wrist  and  one  entire  foot  by  complete  severance  at  or  above 
the  ankle,  or  the  irrecoverable  loss  of  the  entire  sight  of  both  eyes,  he  shall  be  deemed  to  have  sustained  a  [>ermanent  disabil- 
ity resulting  in  continuous  total  loss  of  his  business  time  and  the  Company  will  pay  indemnity  at  the  rate  per  month  specified 
in  Part  B  as  kng  as  he  shell  Uve.  or; 

Loss  of  One  Hand  or  One  Fool 

Part  D.  SbouU  the  Insured  suffer,  as  the  direct  result  of  such  injury  or  such  sickness,  the  lo3s  of  one  entire  hand  by 
comi^ete  severance  at  or  above  the  wrist,  or  the  loss  of  one  entire  foot  by  complete  severance  at  or  above  the  ankle,  the  Com- 
pany will  pay  indemnity  at  the  rate  per  month  specified  in  Part  B  for  the  period  for  which  such  loss  causes  disability  as  defined 
above,  and  at  the  termination  of  such  disability  will  consider  such  loss  to  have  caused  a  permanent  disability  of  25%,  and  will 
pay  the  iBSUied,  m  long  as  he  shall  live,  monthly  indemnity  at  the  rale  of  25%  of  the  amount  specified  in  Part  B,  or; 

Loss  of  the  Sight  d  One  Eye 

fVrt  E.  Should  the  Insured  suffer,  as  the  direct  result  of  such  injury  or  such  sickness,  the  irrecoverable  loss  of  the  entire 
sight  of  oi>e  eye,  the  Company  will  pay  indemnity  at  the  rate  per  month  specified  in  Part  B  for  the  period  for  which  such  loss 
causes  disability  as  defined  above,  and  at  the  termination  of  audi  disability  will  consider  such  loss  to  have  caused  a  permanent 
disability  of  10%.  and  will  pay  the'lnsured,  as  long  as  he  shall  live,  monthly  indemnity  at  the  rate  of  10%  of  the  amount 
specified  in  Part  B. 

*No  indemnity  is  payable  under  this  policy  for  the  specified  first  part  of  any  period  of  disability. 


Renewable  through  age  65. 


400   INSURANCE  PRINCIPLES  AND  PRACTICES 

XVIU— Continued 
Standard  Provisions 

I.  This  policy  include*  the  endorsements  and  attached  papers,  if  any,  and  contains  the  entire  contract  of  insurance 
«xcept  as  it  may  be  modified  by  the  Company's  classification  of  risks  and  premium  rates  in  the  event  that  the  Insured  is 
injured  or  contracts  sickness  after  having  changed  his  occupation  to  one  classified  by  the  Company  as  more  hazardou< 
than  that  stated  in  the  policy,  or  while  he  is  doing  any  act  or  thing  pertaining  to  any  occupation  so  classified,  except  ordi- 
nary duties  about  his  residence  or  while  engaged  in  recreation,  in  which  event  the  Company  will  pay  only  such  portion  of 
the  indemnities  provided  in  the  policy  as  the  premium  paid  would  have  purchased  at  the  rate  but  within  the  limit*  so  fixed 
by  Jie  Company  for  such  more  hazardous  occupation. 

If  the  law  of  the  state  in  which  the  Insured  resides  at  the  time  this  policy  is  issued  requires  that  prior  to  its  issue  a  state- 
ment of  the  premium  rales  tind  cUissification  of  risks  pertaining  to  it  shall  be  filed  with  the  state  official  having  supervision 
of  insuremce  in  such  state,  then  the  premium  rates  and  classification  of  risks  mentioned  in  this  policy  shall  mean  only  such 
as  have  been  last  filed  by  the  Company  in  accordance  with  such  law,  but  if  such  filing  is  not  required  by  such  law  then  they 
shall  mean  the  Company's  premium  rates  and  classification  of  risks  last  made  effective  by  it  in  such  state  prior  to  the 
occurrence  of  the  loss  for  which  the  Company  is  liable. 

2.  No  statement  made  by  the  applicant  for  insurance  not  included  htrein  shall  avoid  the  policy  or  be  used  in  any  legal  proceeding  hereunder.  No 
.agent  has  authority  to  change  this  policy  or  to  waive  any  of  its  provisions.  No  change  in  this  policy  shall  be  valid  tmless  approved  by  an  executive  officer  of 
the  Company  and  such  approval  be  endorsed  hereon. 

3.  If  default  be  made  in  the  payment  cf  the  agreed  premium  for  this  policy,  the  subsequent  acceptance  of  a  premium  by  the  Company  or  by  any  of 
its  duly  authorized  agents  shall  reinstate  the  policy  but  only  to  cover  accidental  injury  thereafter  sustained  and  such  sickness  as  may  begio  more  than  ten  day« 
after  the  date  of  such  acceptance. 

4.  Written  notice  of  injury  or  of  sickness  on  which  claim  may  be  based  must  be  given  to  the  Company  ^vithin 
twenty  days  after  the  date  of  the  accident  causing  such  injury  or  within  ten  days  after  the  commencement  of  disability 
from  such  sickness.    In  event  of  accidental  death  immediate  notice  thereof  must  be  given  to  the  Company. 

5.  Such  notice  given  by  or  in  behalf  of  the  Insured  or  beneficiary,  •  as  the  case  may  be,  to  the  Company  at  its  Home  Office,  '      i    .    ^ 

In  the  city  of  or  to  any  authorized  agent  of  the  Company,  with  particulars  sufficient  to  identify  the  Insured,  shall  be  deemed  to 

te  notice  to  the  Company.     Failure  to  give  notice  \vIthio  the  time  provided  in  this  policy  shall  not  invalidate  any  claim  if  it  shall  be  shows  0*1  to  have  beeo 
Teasonably  possible  to  give  such  notice  and  that  notice  was  given  as  soon  as  was  reasonably  possible. 

6.  The  Company  upon  receipt  of  such  notice,  will  furnish  to  the  claimant  such  forms  as  are  usually  Furnished  by  it  for  filing  proofs  of  loss.  If  nich 
Conns  are  not  so  furnished  within  fifteen  days  after  the  receipt  of  such  notice,  the  claimant  shall  be  deemed  to  have  complied  with  the  reqairements  of  this 
policy  as  to  proof  of  loss  upon  submitting  withio  the  time  fiaed  in  the  policy  for  filing  proofs  of  loss,  written  proof  covering  the  occurrence,  character  and  exteot 
of  the  loss  for  which  claim  is  made. 

7.  Affirmative  proof  of  loss  must  be  furnished  to  the  Company  at  its  said  office  in  case  of  claim  for  loss  of  time  from  disability  withm  ninety  days 
after  the  termination  of  the  period  for  which  the  Company  is  Hable,  and  b  case  of  claim  for  any  other  loss,  within  ninety  days  after  the  date  of  nich  Ion. 

g^  TTie  Company  shall  have  the  right  and  (jpporttmity  to  examine  th^  person  of  the  Insured  when  and  so  often  as  it  may  reasonably  require  duriog 
tile  pendency  of  claim  hereunder,  and  also  the  right  and  opportunity  to  make  an  autopsy  in  case  of  death  where  it  is  not  forbidden  by  law. 

9.  *  All  indenmides  provided  in  this  policy  for  loss  other  than  that  of  time  on  account  of  disability  will  be  paid  immediately  after  receipt  of  due  proof. 

0.     Upon  request  of  the  Insured  and  subject  to  due  proof  of  loss  all  of  the  accrued  indemnity  for  loss  of  time  on  account  of  disability  will  be  paid  at 
piration  of  each  month  during  the  continuance  of  the  period  for  which  (he  Company  is  liable,  and  any  balance  remaining  unpaid  at  the  lenninatioD  of 
such  period  will  be  paid  immediately  upon  receipt  of  due  proof. 

I I .  Indemnity  for  loss  of  life  of  the  Insured  is  payable  to  the  beneficiary  if  surviving  the  Insured,  and  otherwise  to  the  est^  of  the  Insured.  All 
other  indemnities  of  this  pohcy  are  payable  to  the  Insured. 

12.  If  the  Insured  shall  at  any  time  change  bis  occupation  to  one  classified  by  the  Company  as  less  hazardous  than  that  stated  in  the  policy,  the 
Company,  upon  written  request  of  the  Insured  and  surrender  of  the  policy,  will  cancel  the  same  and  will  return  to  the  Insured  the  unearned  premium. 

\  3.  Consent  of  the  beneficiary  shall  not  be  requisite  to  saiiender  or  assigiuncot  of  this  policy,  or  to  change  of  beneficiary,  or  to  any  other  diaaeea  id 
<he  policy. 

14.  No  action  at  law  or  in  equity  shall  be  brought  to  recover  on  this  policy  prior  to  the  expiration  of  sixty  days  after  proof  of  loss  has  been  Eled  i& 
accordance  with  the  requirements  of  this  policy,  nor  shall  such  action  be  brought  at  all  unless  brought  within  two  years  from  the  expiration  of  the  time  wtinB 
which  proof  of  loss  is  required  by  the  policy. 

15.  If  any  time  limitation  of  this  policy  with  respect  to  giving  notice  of  claim  or  furnishing  proof  of  loss  is  less  than  that  permitted  by  the  law  of  the 
state  in  which  the  Insured  resides  at  tlie  time  this  policy  is  issued,  such  limitation  is  hereby  extended  to  agree  with  the  minimum  period  permitted  by  such  law. 

18.  Upon  6ie  payment  of  claim  hereunder  any  premium  then  due  and  uipaid  or  covered  by  any  note  or  written  order  may  be  deducted  therefrom. 

19.  If  a  like  policy  or  policies,  previously  issued  by  the  Company  to  the  Insured  be  in  force  concurrently  herewith, 
making  the  aggregate  indemnity  for  loss  other  than  that  of  time  on  account  of  disability  in  excess  of  $50,000.00,  or  tha 
aggregate  indemnity  for  loss  of  time  on  account  of  disability  in  excess  of  $250.00  weekly,  the  excess  insurance  of  either 
kind  shall  be  void  and  eJI  premiums  paid  for  such  excess  shall  be  returned  to  the  Insured. 

20.     The  insurance  under  tliis  policy  shall  not  cover  any  person  tmder  the  age  of  ci^teen  years  nor  over  the  age  of  sixty.five  years.    Any  premium  paid  to 
jSiit  Company  for  any  period  not  covered  hy  this  policy  will  be  returned  upon  request. 


APPENDIX  401 

XVlll— Continued 
Additional  Provisions 

21.  This  insurance  does  not  cover,  (1)  any  disabUity  for  which  the  Insured  is  not  necessarily  and  regularly  attended 
by  a  legally  qualified  physician  other  than  the  Insured;  provic'ed,  however,  that  this  requirement  shall  be  waived  in  the  event 
such  attendance  is  decWed  by  medical  authority  satisfactory  to  the  Company  to  be  unnecessary;  (2)  suidde,  sane  or  insane, 
or  any  attempt  thereat,  sane  or  insane;  (3)  women;  (4)  loss  of  life  or  disability  resulting  wholly  or  partly,  directly  or 
indirectly  from  (a)  bodily  injury  sustained  or  sickness  contracted  while  the  Insured  is  engaged  in  military  or  naval  service  ia 
time  of  war;  (b)  bodily  injury  or  sickness  caused  by  war  or  by  any  act  of  war;  (c)  bodily  injury  sustained  or  sickness  con- 
tracted from  riding  or  being  in  or  upon  any  aerial  device  or  conveyance;  (d)  bodily  injury  sustained  or  sickness  contracted 
while  the  Insured  is  outside  Canada  or  Europe  or  the  United  States  (not  including  Alaska,  Panama  Canal  Zone  or  tlie  inmil^f 
possessions  of  the  United  States). 

22.  No  recovery  shall  be  had  on  account  of  disability  from  sickness  for  any  period  of  time  for  viduch  the  Insured  \a 
entitled  to  indemnity  for  bodily  injury  under  any  policy  in  this  Company,  except  in  the  event  of  payment  of  claim  for  indem- 
nity on  a  percentage  basis  as  provided  in  Parts  D  or  E,  but  in  no  event  shall  indemnity  be  payable  under  this  policy  at  a  rata 
per  month  in  excess  of  that  specified  in  Part  B.  Failure  to  comply  with  any  of  tlie  provisions  of  this  policy  sludl  renier  in- 
valid any  claim  under  this  policy. 

23.  After  the  first  twelve  months  of  disability,  no  indemnity  shall  be  payable  for  any  period  of  disability  during  which 
tlie  Insured  is  not  continuously  within  the  United  States  (not  including  Alaska,  the  Panama  Canal  Zone  or  the  insular  posses- 
sions of  the  United  States)  unless  a  written  permit  to  reside  elsewhere  be  granted  by  the  Company. 

24.  Until  the  Insured  becomes  sixty-six  years  of  age  he  shall  have  the  right  to  renew  this  policy  from  year  to  year  by  Ae 
payment  of  the  premium  as  herein  provided.  All  premiums  are  due  and  payable  on  or  before  the  anniversary  date  of  thia 
policy  either  at  the  Home  Office  of  the  Company  in  the  City  of  or  to  any  authorized  agent  cf  the  Company,  but 
a  grace  of  thirty-one  days  shall  be  granted  for  the  payment  of  every  premium  after  the  first,  during  which  time  the  insurance 
hereunder,  shall  continue  in  force.  No  premium  receipt  is  valid  unless  signed  by  the  President  or  a  Vice  President  or  the 
Secretary  or  an  Assistant  Secretary  of  the  Company.  After  any  default  in  peyment  of  premium  this  policy  may  be  reinstated 
es  provided  in  Standard  Provision  Number  3  at  any  time  within  six  months  from  the  date  of  such  default  on  written  appUca- 
tion  by  the  Insured  to  the  Home  Office  of  the  Company  and  the  payment  cf  the  defaulted  premium,  provided  tfca  Insured 
shall  with  such  application  submit  evidence  of  insurability  satisfactory  to  the  Company.  This  policy  shall  be  incontestable 
after  one  year  from  its  date  as  to  the  time  of  the  happenog  of  bodily  injury  or  sickness  causing  disability  commencing  after 
such  year  and  while  this  policy  is  in  force. 

25.  At  any  time  during  the  life  of  this  policy,  if  the  Insured  changes  his  occupation  to  one  different  from  t^tct  stated 
in  this  policy,  the  Company  hereby  agrees  upon  the  surrender  of  this  policy  to  issue  in  lieu  thereof  upon  the  written  letiuest  of 
the  Insured,  a  new  policy  containing  the  same  provisions  as  this  policy  except  a  change  in  the  amount  of  the  benefits  payable, 
tlie  new  policy  to  provide  such  an  amount  payable  for  loss  of  life  and  disability  as  the  premium  paid  for  this  policy  will  pur- 
chase at  the  rates  but  within  the  limits  fi::ed  by  the  Company  for  such  different  occupation. 

26.  Tlie  Insured  b  by  occupation  a 
classified  J>y  the  Company. 

27.  The  beneficiary  under  this  policy  is 

whose  relationship  to  the  Insured  is  that  of  .    No  assignment  of  interest  under  tlus 

policy  and  no  change  of  beneficiary  shall  bind  the  Company  unless  consent  thereto,  duly  signed  by  an  executive  officer  of 
the  Company,  is  formally  endorsed  hereon.  The  Company  shall  not  be  responsible  for  the  validity  of  any  m**!^^!^!.-!!!  or 
change  of  beneficiary. 

28.  This  insurance  is  effective  in  consideration  of  the  payment  in  advance  of  the  premium 
of  DoUar» 

and  of  the  payment  of  a  like  premium  on  the  Jay  of  in  e^ch  year 

during  the  continuance  of  this  Policy,  and  in  further  consideration  of  the  statements  made  in  the  application  for  this  policy, 
copy  of  which  application  is  endorsed  hereon  or  attached  hereto,  and  is  hereby  made  a  part  of  tliis  Policy.  The  falsity  of 
any  statement  in  the  application,  materially  affecting  either  the  acceptance  of  the  risk  or  the  hazard  assumed  hereunder,  or 
made  with  intent  to  deceive  shall  bar  ail  right  to  recovery  under  this  policy.  No  provision  of  the  chortef,  constitution  at 
by-laws  of  the  Company  not  herein  set  forth  shall  be  used  in  defense  of  any  claim  arising  under  this  policy. 

IN  WITNESS  WHEREOF,  THE  COMPANY  has,  by  its  proper  oflScers.  signed  this  Contract  in  the  Gty  of 
and  caused  same  to  be  countersigned  by  its  authorized  Agent  or  Manager,  as^ofUi^i 

day  of  •  19 

EXAMINED 

SEICRETARY 
COUNTERSIGNED 

Al/THORIZEO  AGENT  OR  MiUS^iCEK 


402    INSURANCE  PRINCIPLES  AND  PRACTICES 

XIX 
ACCIDENT  AND  HEALTH  RATES 


Class 

Monthly  Acci- 
dent and  Illness 
Indemnity 

Yearly  Premiums 

Accidental 
Death,  Loss  of 

Ages  18  to  50 

Ages  51  to  55 

Both  Limbs 
or  Eyes 

Select  and 
Preferred 

$50  00 

76  00 

80  00 

90  00 

100  00 

100  00 

100  00 

100  00 

100  00 

50  00 

$21  00 
31  50 
33  60 
37  80 

42  00 

43  50 

45  00 

46  50 
48  00 
24  00 

S26  50 
39  75 
42  40 
47  70 

53  00 

54  50 

56  00 

57  50 
59  00 
29  50 

$500  00 

750  00 

800  00 

900  00 

1000  00 

2000  00 

3000  00 

4{X)0  00 

5000  00 

2500  00 

Extra 
Preferred 

$40  00 

50  00 

60  00 

80  00 

100  00 

100  00 

100  00 

100  00 

100  00 

50  00 

§18  85 
23  30 
28  00 
37  17   ' 
4G  60 
48  70 
60  80 
52  90 
55  00 
27  50 

$23  25 
28  80 
34  56 
45  97 
57  60 
59  70 
61  80 
64  00 
66  10 
33  00 

$500  00 

500  00 

600  00 

750  00 

1000  00 

2000  00 

3000  00 

4000  00 

5000  00 

2500  00 

Ordinary 

$40  GO 
40  00 
60  00 
60  00 
60  00 
60  00 
80  00 
90  00 

100  00 
50  00 

$23  70 
25  95 
31  50 
37  05 
40  80 
44  65 
59  40 
64  95 
74  25 
37  12 

$28  10 
30  35 
37  00 
43  65 
47  40 
51  15 
68  20 
74  85 
85  25 
42  62 

$'i00  00 
1000  00 
1000  00 
1000  GO 
2000  00 
3000  00 
4000  00 
4000  00 
5000  00 
2500  00 

Medium 

$35  00 
35  00 
40  00 
50  00 
50  00 

$24  60 
28  17 
31  45 
38  00 
43  25 

$28  35 
32  02 
35  85 
43  50 
48  7.5 

$300  00 
1000  00 
1000  00 
1000  00 
2000  00 

Special 

$30  00 
35  00 
40  00 
45  00 
60  00 

$85  20 
40  87 
46  56 
52  81 
58  48 

Not  Sold  to 
IMen  Over  50 

$400  00 
450  00 
600  00 
600  00 
650  00 

Hazardous 

$25  00 
30  00 

35  00 
40  00 

$34  38 
41  90 
48  61 
55  33 

Not  Sold  to 
"Men  Over  50 

$300  00 
400  00 
450  00 
500  00 

Amoimts  for  Select,  Preferred  and  Extra  Preferred  Class 

may  be  doubled. 

ANNUAL  PREMIUM  ONLY 


APPENDIX 


403 


XX 


SCOPE  OF  COMPENSATION  LAWS  OF  THE  UNITED  STATES' 

,  Inclusions: 

A.  Both   hazardous    and   non-hazardous   employments 32 

B.  Hazardous  employments  only 13 

.  Exclusions: 

A.  Numerical    exemptions    22 

B.  Agriculture   33 

C.  Domestic  Service 29 

D.  Casual  labor  and  employment  not  for  employer's  business 34 

E.  Employments  not  conducted  for  gain 11 

F.  Public  employments    19 

G.  Other  employments  of  certain  kinds 25 

Total    45 

*  Including  Alaska,  Hawaii,  Porto  Rico. 


XXI 


COMPENSATION  STATES  CLASSIFIED  ACCORDING  TO  WHETHER 
LAW  IS   COMPULSORY   OR  ELECTIVE 


Compensation    compulsory    (14) 
Insurance  Insurance  not 


required    (13) 

California 

Hawaii 

Idaho 

Illinois 

Maryland 

New  York 

North  Dakota 

Ohio 

Oklahoma 

Porto    Rico 

Utah 

Washington 

Wyoming 


required   (1) 
Arizona 


Compensation   elective    (31) 
Insurance  Insurance  not 


required   {26) 

Colorado 

Connecticut 

Delaware 

Indiana 

Iowa 

Kentucky 

Maine 

Massachusetts 

Michigan 

Missouri 

Montana 

Nebraska 

Nevada 

New    Hampshire 

New  Jersey 

New  Mexico 

Oregon 

Pennsylvania 

phode  Island 

South  Dakota 

Tennessee 

Texas 

Vermont 

Virginia 

West  Virginia 

Wisconsin 


required    (5) 

Alabama 

Alaska 

Kansas 

Louisiana 

Minnesota 


404    INSURANCE  PRINCIPLES  AND  PRACTICES 


XXII 


COMPULSORY  INSURANCE  STATES,  CLASSIFIED  AS  TO  DIFFERENT 
KINDS  OF  INSURANCE  ALLOWED 


State  Fund  (17) 
Exclusive    (8)         Competitive  (9) 


Nevada 
North  Dakota 
Ohio 
Oregon 
Porto   Rico 
Washington 
West  Virginia 
Wyoming 


California 

Colorado 

Idaho 

Maryland 

Michigan 

Montana 

New  York 

Pennsylvania 

Utah 


Private  insur- 
ance   (31) 

California 

Colorado 

Connecticut 

Delaware 

Hawaii 

Idaho 

Illinois 

Indiana 

Iowa 

Kentucky 

Maine 

Maryland 

Massachusetts 

Michigan 

Missouri 

Montana 

Nebraska 

New  Hampshire 

New  Jersey 

New  Mexico 

New  York 

Oklahoma 

Pennsylvania 

Rhode  Island 

South  Dakota 

Tennessee 

Texas 

Utah 

Vermont 

Virginia 

Wisconsin 


Self-insur- 
ance   (31) 

California 

Colorado 

Connecticut 

Delaware 

Hawaii 

Idaho 

Illinois 

Indiana 

Iowa 

Kentucky 

Maine 

Maryland 

Michigan 

Missouri 

Montana 

Nebraska 

New  Hampshire 

New  Jersey 

New  Mexico 

New   York 

Ohio 

Oklahoma 

Pennsylvania 

Rhode  Island 

South  Dakota 

Tennessee 

Utah 

Vermont 

Virginia 

West  Virginia 

Wisconsin 


APPENDIX 


405 


XXIII 


UNIVERSAL  STANDARD  WORKMEN'S  COMPENSATION  POLICY 


(Hereinafter  called  the  Company) 
HEREBY  AGREES  WITH  THE  ASSURED 

N?mctl   in  the  Declarations  attached  hereto  and  forming  part  hereof,   as  respects  personal  injury  sustained  by 

employes,  including  death  at  any  time  resulting  therefrom. 

One.     (a)    To  Pay  Promptly  to  any  person  entitle^!  thereto,  under  the  Workmen's  Compensation  Law  and 
in  the  manner  therein  provided,  the  entire  amount  of  any  sum  due,  and  all  installments  ttercof  as  they  become  due, 

(/)  To  suck  ptncn  because  of  the  obligation  fcr  compensation  for  any  surh  injury  imposed  upo't  or  accepted  by  this 
Employer  under  such  of  certain  statutes,  as  may  be  applicable  thereto,  cUed  and  described  in  an  endorsement 
attacked  to  this  Policy,  each  of  which  statutes  is  herein  referred  to  as  the  Workmen' s  Cmipensation  Law,  and 

(<?)      For  the  benefit  ofsueh  person  the  proper  cost  of  whatever  medxcal.  surgical,  nurse  or  hospit-ai  servf^e^  medical  or 
surgical  apparatus  or  appliances  and  medicines,  or.  in  the  event  of  fatal  injury,  whatever  fum^ 
required  by  the  provisions  of  such  Workmen's  Compensation  Law. 
It  is  agreed  that  all  of  the  provisions  of  each  Workmen's  Compensation  Law  covered  hereby  stifell 
a  part  of  this  contract  as  fully  and  completely  as  if  written  herein,  so  far  as  they  apply  t 
benefits  for  any  personal  injury  or  death  covered  by  this  Policy,  while  this  Policy  i,hzilAuKMfi\i 
herein  contained  shall  operate  to  so  extend  this  Policy  as  to  include  within  its  terms  a^vfrOA/^fc^^  s 
Law,  scheme  or  plan  not  cited  in  an  endorsehient  hereto  attached. 

One.    (b)    To  Indemnify  this  Employer  against  loss  by  reason  of 
for  damages  on  account  of  such  injuries  to  such  of  said  employes  as  are  leg 
be  sustained  within  the  territorial  limits  of  the  United  States  of  America  or 
the  bankruptcy  or  insolvency  of  this  Employer  the  Company  shall  nd 
r,ity  hereunder  as  would  have  been  payable  but  for  such  bankn!^*3y 
insolvency,  an  execution  against  this  Employer  is  returned  /ipnsatis 
another  person  claiming  by,  through  or  under  the  injured,  ti 
such  other  person  claiming  by,  through  or  under  the  injured, 
the  amount  of  the  judgment  in  said  action  not  exceedip^ 

Two.    To  Serve  this  Employer  (a)  by  the  insp^ctioi 
desirable  by  the  Company  and  thereupon  to  suRjfS^t^XltiisVfimployer  such  changes  or  improvements  as  may  operate 
to  reduce  the  number  or  severity  of  injuries  Svi?i*(g.itofk,  and,  (b)  upon  notice  of  such  injuries,  by.  investigation 
thereof  and  by  settlement  of  any  resultin3:S&ipV5>n-3;Ccordaijce  with  law 


xpeiists  art 

ba  am]  remain 

ion  or  other 

rce.    Nothing 

Compensation 

iposed  upon  him  by  law 

wherever  such  injuries  may 

inion  of  Canada.    In  the  event  of 

from  the  payment  of  such  indem- 

If,  because  of  such  bankruptcy  or 

action  brought  by  the  injured,  or  by 

an  aAtTCn'may  be  maintained  by  the  injured,  or  by 

sK'ihe  Company  under  the  terms  of  this  Policy  for 

'.e  anrrontlt  of  this  Policy. 

work  places  covered  by  the  Policy  when  and  as  deemed 


Three.    To  Defend,  i 

at  any  time  be  instituted  aga: 
injuries  and  demanding  damage 
demands  are  wholly  groundl^Js^  f^ 

Four.    To  Pay 

interest  accruing  after 
defense. 


behalf  of  this  Employer,  any  suits  or  other  proceedings  which  may 

of  such  injuries,  including  suits  or  other  proceedings  alleging  such 

nsation  therefor,  although- such  suits,  other  proceedings,  allegations  or 

raudulent 

cl  against  this  Employer  in  any  legal  proceeding  defended  by  the  Company,  all 
gment  and  all  expenses  incurred  by  the  Company  for  investigation,  negotiation  or 


ement  shall  apply  to  such  injuries  sustained  by  any  person  or  persons  employed  by  this 
'remuneration  shall  be  included  in  the  total  actuat  remuneration  for  wi.ich  provision  is  herein- 
remuneration  the  premium  for  this  Policy  is  to  be  computed  and  adjusted,  and,  also  to  such 
bedUy  the  President,  any  Vice-President,  Secretary  or  Treasurer  of  this  Employer,  if  a  corporation. 
?ron  of  any  such  designated  officer  shall  not  be  subjected  to  a  premium  charge  unless  he  is  actually 
performing  such  duties  as  are  ordinarily  undertaken  by  a  superintendent,  foreman  or  workman. 

Six.  This  agreement  shall  apply  to  such. injuries  so  sustained  by  reason  of  the  business  operations  described 
in  said  Declarations  which,  for  the  purpose  of  this  insurance,  shall  include  all  operations  necessary,  incident  or  appur- 
tenant thereto,  or  connected  therewith,  whether  such  operations  are  conducted  at  the  work  places  defined  and 
described  in  said  Declarations  or  elsewhere  in  connection  with,  or  in  relation  to,  such  work  places. 

Seven.  This  agreement  shall  apply  only  to  such  injuries  so  sustained  by  reason  of  accidents.occurring  during 
the  Policy  period- limited  and  defined  as  such  in  Item  2  of  said  Declarations. 

THIS  AGREEMENT  IS  SUBJECT  TO  THE  FOLLOWING  CONDITIONS : 


A.  The  premium  is  based  upon  the  entire  remunera- 
tion earned,  during  the  Policy  period,  by  all  employes  of 
this  Employer  engaged  in  the  burliness  operations  described 
in  said  Declarations  together  with  all  operations  necessary, 
incident  or  af^urtenant  thereto,  or  connected  therewith 
whether  conducted  at  such  work  places  or  elsewhere  in 
connection  therewith  or  in  relation  thereto ;  excepting 
however  the  rAnuneration  of  the  President,  any  Vice- 
President,  Secretary  or  Treasurer  of  this  Employer,  if  a 
corporation,  but  including  the  remuneration  of  any  one  or 
more  of  siicl)^(;lesignated  officers  who  are  actually  perform- 
ing such  duties  as  are  ordinarily  undertaken  by  a  superin- 
tendent, foi-eman  or  workman.  If  any  operations  as  above 
defined  are  undertaken  by  this  Employer  but  are  not  de- 
scribed or  rated  in  said  Declarations,  this  Employer  agrees 
tf>  pay  the  premium  thereon,  at  the  tirr.e  of  the  final  ad- 
justment of  the  premium  in  accordance  with  Condition  C 
hereof,  at  the  rates,  and  in  compliance  with-  the  rules,  of 
IheManualof  Rates  in  use  by  the  Company  upon  the  date 


of  issue  of  this  Policy.  At  the  end  of  the  Policy  period  the 
actual  amount  of  the  remuneration  earned  by  employes 
during  such  period  shall  be  exhibited  to  the  Company,  as 
provided  in  Condition  C  hereof,  and  the  earned  premium 
adjusted  in  accordance  therewith  at  the  rates  and  under 
the  conditions  herein  specified.  If  the  earned  premium, 
thus  computed,  is  greater  than  the  advance  premium  paid, 
this  Employershall.immediately  pay  the  additional  amount 
to  the  Company,  if  less,  the  Company  shall  return  to  this 
Employer  the  unearned  portion,  but  in  any  event  the 
Company  shall  retain  the  Minimum  Premium  stated  in 
said  Declarations.  All  premiums  provided  by  this  Policy, 
or  by  any  endorsement  hereon,  shall  be  fully  earned 
whether  any  such  Workmen's  Compensation  Law,  or  any 
j>art  of  such,  is  now  or  shall  bercafier.be  declared  iavalid 
or  unconstitutional. 

B.    This  Policy  may  be  cancelled  at  any  time  by  either 
pf.lhe  parties  upon  written  notice  to  the  other  party  statias 


406    INSURANCE  PRINCIPLES  AND  PRACTICES 

XXlll— Continued 


when,  not  less  than  ten  days  thereafter,  cancellation  shall 
be  effective.  The  effective  date  of  such  cancellation  shall 
then  be  the  end  of  the  Policy  period.  The  law  of  any  state, 
in  which  this  Policy  applies,  which  requires  that  notice  of 
cancellation  shall  be  given  to  any  Board,  Commission  or 
other  state  agency  is  hereby  made  a  part  of  this  Policy 
and  cancellation  in  such  state  shall  not  be  effective  except 
in  compliance  with  such  law.  The  remuneration  of  em- 
ployes for  the  Policy  period  stated  in  said  Declarations 
shall  be  computed  upon  the  basis  of  the  actual  remunera- 
tion to  the  date  of  cancellation  determined  as  herein  pro- 
vided. ]f  such  cancellation  is  at  the  Company's  request, 
the  earned  premium  shall  be  adjusted  pro  rata  as  provided 
in  Condition  A.  If  such  cancellation  h  at  this  Employer's 
request,  the  earned  premium  shall  be  computed  and  ad- 
justed at  short  rates,  in  accordance  with  the  table  printed 
hereon,  but  such  short  rate  premium  shall  not  be  less  than 
the  Minimum  Premium  stated  in  said  Declarations.  If  this 
Employer  when  requesting  cancellation  i.s  actually  retiring 
from  the  business  herein  described,  then  the  earned  pre- 
mium shall  be  computed  and  adjusted  pro  rata.  Notice  of 
cancellation  shall  be  served  upon  this  Employer  as  the 
law  requires,  but,  if  no  different  requirement,  notice 
mailed  to  the  address  of  this  Employer  herein  give.i  shall 
be  a  sufficient  notice,  and  the  check  of  the  Company, 
similarly  mailed,  a  sufficient  tender  of  any  unearned 
premium. 

C.  The  Company  shall  be  permitted,  at  all  reasonable 
times  during  the  Policy  period,  to  inspect  the  plants,  works, 
machinery  and  appliances  covered  by  this  Policy,  and  to 
examine  this  Employer's  books  at  any  time  during  the 
Policy  period,  and  any  extension  thereof,  and  within  one 
year  after  its  final  expiration,  so  far  as  they  relate  to  the 
remuneration  earned  by  any  employes  of  this  Employer 
while  this  Policy  was  in  force. 

D.  »The  obligations  of  Paragraph  One  (a)  foregoing 
are  hereby  declared  to  be  the  direct  obligations  and  prom- 
ises of  the- Company  to  any  injured  employe  covered 
hereby,  or.  in  the  event  of  his  death,  to  his  dependents; 
and  to  each  such  employe  or  such  dependent  the  Com- 
pany is  hereby  made  directly  and  primarily  liable  under 
said  obligations  and  promises.  This  contract  is  made  for 
the  benefit  of  such  employes  or  such  dependents  and  is 
enforceable  against  the  Company,  by  any  such  employe 
or  such  dependent  in  his  name  or  on  his  behalf,  at  any 
time  and  in  any  manner  permitted  by  law.  whether  claims 
or  proceedings  are  brought  against  the  Company  alone  or 
jointly  with  this  Employer.  If  the  law  of  any  state  in 
which  the  Policy  is  applicable  provides  for  the  enforce- 
ment of  the  rights  of  such  employes  or  such  dependents 
by  any  Commission,  Board  or  other  state  agency  for  the 
benefit  of  such  employes  or  such  dependents,  then  the 
provisions  of  such  law  are  made  a  part  hereof,  as  respects 
any  matter  subject  thereto,  as  fully  as  if  written  herein. 
The  obligations  and  promises  of  the  Company  as  set  forth 
in  this  paragraph  shall  not  be  affected  by  the  failure  of 
this  Employer  to  do  or  refrain  from  doing  any  act  required 
by  the  Policy ;  nor  by  any  default  of  this  Employer  after 
the  accident  in  the  payment  of  premiums  or  in  the  giving 
of  any  notice  required  by  the  Policy  or  otherwise  ;  nor  by 
the  death,  insolvency,  bankruptcy,  legal  incapacity  or  in- 
ability of  this  Employer,  nor  by  any  proceeding  against 
him  as  a  result  of  which  the  conduct  of  this  Employer's 
business  may  be  and  continue  to  be  in  charge  of  an  exec- 
utor, administrator,  receiver,  trustee,  assignee,  or  other 
person. 

E.  As  between  the  employe  and  the  Company,  notice 
to  or  knowledge  of  this  Employer  of  an  injury  or  death 
covered  hereby  shall  be  notice  or  knowledge,  as  the  case 
tnay  be,  of  the  Company;  the  jurisdiction  of  this  Employer 


for  the  purposes  of  any  Workmen's  Compensation  Law 
covered  hereby  shall  be  jurisdiction  of  the  Company  and 
the  Companv  shj  In  all  things  be  bound  by  and  subject 
to  the  findi.ig's,  judgments,  awards,  decrees,  orders  or  de- 
cisior  rendered  against  this  Employer  in  the  form  and 
manner  provided  by  such  laws  and  within  the  terms,  limi- 
tations and  provisions  of  this  Policy  not  inconsistent  with 
such  laws. 

F.  This  Employer,  upon  the  occurrence  of  an  accident, 
shall  give  immediate  written  notice  thereof  to  the  Com- 
pany with  the  fullest  information  obtainable.  He'  shall 
give  like  notice  with  full  particulars  of  any  claim  made  on 
account  of  such  accident.  If,  thereafter,  any  suit  or  other 
proceeding  is  instituted  against  this  Employer,  he  shall 
immediately  forward  to  the  Company  every  summons, 
notice  or  other  process  served  upon  him.  Nothing  else- 
where contained  in  this  Policy  shall  relieve  this  Employer 
of  his  obligations  to  the  Company  with  respect  to  notice 
as  herein  imposed  upon  him. 

G.  No  action  shall  lie  against  the  Company  to  recover 
upon  any  claim  or  for  any  loss  under  Paragraph  One  (b) 
foregoing  unless  brought  after  the  amount  of  such  claim 
or  loss  shall  have  been  fixed  and  rendered  certain  either 
by  final  judgment  against  this  Employer  after  trial  of  the 
issue  or  by  agreement  between  the  parties  with  the  writ- 
ten consent  of  the  Company,  nor  in  any  event  unless 
brought  within  two  years  thereafter. 

"H.  If  the  method  of  serving  notice  of  cancellation,  or 
the  limit  of  time  for  notice  of  accident  or  for  any  legal 
proceeding  herein  contained  is  at  variance  with  any 
specific  statutory  provision  in  relation  thereto,  in  force  in 
the  stale  in  which  any  of  the  business  operations  herein 
described  are  conducted,  such  specific  statutory  provision 
shall  supersede  any  such  condition  in  this  contract  incon- 
sistent therewith. 

I.  No  assignment  of  interest  under  this  Policy  shall 
bind  the  Company  unless  the  consent  of  the  Company 
shall  be  endorsed  hereon. 

J.  If  this  Employer  carries  any  other  insurance  cover- 
ing a  claim  covered  by  this  Policy,  he  shall  not  recover 
from  the  Company  a  larger  proportion  of  any  such  claim 
than  the  sum  hereby  insured  bears  to  the  whole  amount 
of  valid  and  collectible  insurance. 

K.  The  Company  shall  be  subrogated  in  case  of  any 
payment  under  this  Policy,  to  the  extent  of  such  payment, 
to  all  rights  of  recovery  therefor  vested  by  law  either  in 
this  Employer,  or  in  any  employe  or  his  dependents 
claiming  heraunder,  against  persons,  corporations,  associ- 
ations or  estates. 

L.  No  condition  or  provision  of  this  Policy  shall  be 
waived  or  altered  except  by  endorsement  attached  hereto 
signed  by  the  President,  a  Vice-President.  Secretary  or 
an  Assistant  Secretary  of  the  Company,  nor  shall  notice 
to  any  agent,  nor  shall  knowledge  possessed  by  any  agent, 
or  by  any  other  person,  be  held  to  effect  a  waiver  or  change 
in  any  part  of  thiscontract.  Changes  in  the  written  portion 
of  the  Declarations  forming  a  part  hereof  (except  Items 
2,'3  and  4)  may  be  made  by  the  agent  countersigning  this 
Policy,  such  changes  binding  the  Company  when  initialed 
by  such  agent.  The  personal  pronoua  herein  used  to 
refer  to  this  Employer  or  to  an  injured  employe  or  de- 
pendents, shall  apply  regardless  of  number  or  gender. 

M.  The  statements  in  Items  1  to  6  inclusive  in  the 
Declarations  hereinafter  contained,  are  true  ;  those  stated 
as  estimates  only  are  believed  to  be  true.  This  Policy  is 
issued  upon  such  statements  and  in  consideration  of  the 
provisions  of  the  Policy  respecting  its  premium  and  the 
payment  of  the  premium  in  such  Declarations  expressed. 


IN  WITNESS  WHEREOF,  the  INSURANCE  COMPANY  OF  has 

caused  this  Policy  to  be  signed  by  its  President  and  Secretary  at  Pennsylvania,  and  countersigned  by 

a  duly  authorized  Agent  of  the  Company. 


Seerelary 


Prtstdent 


Counleriigntd.  by^ 


Agenl 


APPENDIX 


407 


XXUl— Continued 


Short  Rate  Cancellation  Table 

For  Tmtu  of  One  Year 


UNIVERSAL  STANDARD 
WORKMEN'S   COMPENSATION    POLICY 


EzpiBxa. 


Pexkhtm,  $ 


1  dar 2  per  cent,  of  anniul  premlam 

J  <l»ya ;  .  .  .     4  '• 

8  •• 5  •' 

4  " S  •' 

6  " 7  '•  "  " 

6  " 8  "  "  " 

n  ti  g  II  *«  II 

8  " 9  '•  '"  " 

9  ■• 10  "  •'  •• 

10  "        10  "  •'  " 

U  " U  '•  "  " 

12  " 12  "  "  " 

U  " 13  '•  " 

14  " 18  "  " 

15  •• 14  ■•  '• 

18  " 14  ••  ••  " 

17  •• 15  •• 

18  " 16  "  "  •• 

19  " 16  " 

20  •' 17  "  " 

25  '• 19  "  "  '• 

80  •• 20  ••  "  " 

35  " 28  '■  •'  •• 

40  ■' 26  "  '•  " 

46  " 27  " 

50  " 28  "  ••  " 

66  " 29  "  "  " 

60  " SO  "  ■■  •• 

65  "     . 33  '•  ■•  •• 

70  " 36  "  "  •< 

75  " 37  '• 

80  " 38  " 

85  " 39  " 

90  "  or  8  months ...    40  "  "  •' 

105  '•        45  ■•  " 

120  '■  or  4  montlis     .  .   50  "  "  " 

136  " 55  "  ••  " 

150  "  or  5  months ...   60  "  ••  •> 

165  ••        65  " 

180  •'  or  6  months ...    70  "  ■-  " 

195  " 73  •'  ••  " 

210  "  or  7  months ...   75  "  "  " 

225  " 78  "  ••  •• 

240  "  or  8  months ...    80  "  "  *• 

266  •• ffi  ••  "  " 

270  ■'  or  9  months ...   86  "  "  " 

286  •• 88  " 

300  "  or  10  months   .  .   90  "  •'  •• 

816  " 93  "  ••  '» 

880  "  or  11  months    .  .   95  " 

880  "  or  12  months    .  .  100  "  •'  " 


AmrsED 


No.wc_ 


Wi^om^ 


c,^^ 


Please  Read  your  Policy 


408    INSURANCE  PRINCIPLES  AND  PRACTICES 


XXIV 
SAMPLE  CLASSIFICATION   SHEET  OF  COMPENSATION  MANUAL 

Revised  Edition — Basic  Manual  June  30,   1920. 

Classification  No.  P.L.  Teams 

COAL  MERCHANTS: 

Coal   Merchants — receiving  or  shipping  by 
water   or   by   land    and  water,    including 

stevedoring  operations,  if  any 8220  ZH  QA 

Drivers   and   their   Helpers 7212  * 

Chauffeurs   and   their   Helpers 7385  * 

This  classification   not  available  to   con- 
cerns engaged  exclusively  in  stevedoring. 
Coal    Merchants — receiving    or    shipping    by 

land   only    8230  ZH  QA 

Drivers  and  their  Helpers 7221  * 

Chauffeurs   and   their    Helpers 7393  • 

Cocoa    Mfg    2042  ZA  R 

Cocoanut  Shredding  and  Drying    (N.  P.  D.) 

(rate  as  Tood  Sundries") 6504  ZA  R 

Coffee  Cleaning,  Roasting  and  Grinding  (rate 

as  "Food  Sundries") 6504  ZA  R 

COFFIN  AND  CASKET  MFG.: 

Coffin   and    Casket— (wood)    mfg.    and    as- 
sembling   (including  metal   fittings) 2804  ZA  R 

Coffin    and    Casket— (metal)    mfg.    and    as- 
sembling         3074  ZA  R 

Coffin    and    Casket— (concrete)     m.fg.    and 

assembling     4035  ZA  R 

Upholstery   Work    and    Mfg,   Burial    Gar- 
ments           9525  ZA  R 

Coke  Mfg.— (bee-hive) .••      1469  ZD  QA 

Coke    Mfg. — by-product    ovens — no    refining 

of  by-products    1470  ZD  QA 

Cold    Storage    Warehouses — operation 8291  ZG  R 

Collar  and  Cuff  Mfg.— including  laundry...      2520  Z  R 

♦Payroll  must  be  included  in  the  Public  Disability  polic3\ 


APPENDIX 


409 


XXV 


SAMPLE  RATE  SHEET  OF  COMPENSATION  MANUAL 


NEW  JERSEY. 

RATE  SHEET. 

The  Compensation  Rates  and  Minimum  Premiums  for  this  State  are 
shown  below  opposite  the  Code  Numbers  of  the  various  classifications. 
Note:  Symbol  (a)  means  "refer  to  Home  Office." 


Code 

No. 

O004. 
0005. 
0000. 
0008. 
0050. 

0100. 
0101. 
0251. 
0301. 
0302. 

0400. 
0401. 
1102. 
1120. 

1121. 
1154. 
11G4. 
1165. 

1200. 
1201. 
1217. 
1301. 

1321. 
1410. 
1413. 
1420. 

1421. 

1438., 

1430. 

1452. 

1463., 

1465. 
1470., 
1471. 
1472. 


Rate 

.42. 

:     .72. 

.95. 

.42. 

3.83. 

2.18. 
2.18. 
.05. 
1.39. 
2.32. 

1.58. 
3.24. 

2.78., 
4.38. 

4.38. 
6.36. 
3.56. 
3.56. 

2.51. 
4.74. 
3.67. 
1.24. 

2.88.. 
.83., 
1.22. 
2.51. 

3.63. 

2.17.. 

2.00., 

2.30., 

1.44.. 

1.70., 
1.72.. 
2.16., 
1.54., 


Min. 

Code 

Prem. 

No. 

8. 

1602.. 

11. 

1020. . 

14. 

1021.. 

8. 

1022.. 

42. 

1023.. 

26. 

1040.. 

20. 

1654.. 

14. 

1701.. 

IS, 

1703.. 

27. 

1710.. 

20. 

1741.. 

30. 

1742.. 

1743.. 

32. 

1744.. 

48. 

1745.. 

48. 

1748.. 

70. 

1750.. 

1802.. 

40. 

1803.. 

40. 

1852.. 

29. 

1853.. 

50. 

1859.. 
1800.. 

40. 

1924.. 

16. 

2000. . 

32. 

2001.. 

12. 

2002.. 

2014.. 

16. 

2015.. 

29. 

2016.. 

40. 

2020.. 

26. 

2021.. 

25. 

2030.. 

28. 

2040.. 

IS. 

2041.. 

2042.. 

21. 

2045.. 

2054.. 

26. 

2001 . . 

19. 

2062.. 

Rale 

3.86. 
3.80. 
3.86. 
3.86. 
3.86. 

2.92. 
3.86. 
1.76. 
1.59. 
3.13. 

1.59. 
1.59. 
1.59. 
1.59. 
.74. 

.65. 
1.79. 
1.27. 
1.27. 
1.24. 

.74. 

.78. 

.82. 
1.38. 
1.11. 

1.11. 

o  on 

1.42. 
1.24. 
1.11. 

.99. 
1.14. 
2.09. 

.81. 

.81., 
.81., 
.61., 

I.IS. 

1.18., 


Min. 
Piem. 

42. 
42. 
42. 
42. 
42. 

34. 
42. 
22. 

.  2o! 

36. 

20. 
20. 
20. 
20. 
11. 

11. 
22. 
17! 
17. 

10. 

11. 
12. 

12. 

IS. 
15. 

15. 
27. 
IS. 
10. 


14. 
15. 
25. 
10. 
12. 

12. 
12, 
10. 
10, 
10. 


Code 

No. 

2003. 
2005. 
2007. 
2081. 
2090. 

2091. 
2092. 
2101. 
2102. 
2105. 

2110. 
2111. 
2112. 
2114. 

2121. 
2125. 
2130. 
2143. 
2150. 

2101. 
2105. 
2173. 
2174. 
2175. 

2176. 
2210. 
2211. 
2210. 
2220. 

222'* 

2200.! 

2203. 

2204. 

2209. 

2280., 

22S0. 

22SS., 

2291. 

2300. 


Rale 

1.18 
1.18 
1.18 
2.24 
.90 

.90 

.90, 

1.18, 

.87, 
.54. 

1.35. 
1.00. 

.75. 

.75. 

1.52. 
1.52. 
1.72. 
1.35. 
2.00. 

2.43. 
1.35. 

.41. 
4,70. 

.41. 

.11. 
3.07. 
1.41. 

2.48. 
.61. 


,01 . 
t>o 

,23. 

,18. 


1 
1 
1 
2.48. 

1.10. 

.41. 
1.73. 

.41. 

.34. 


Min. 
Prcm. 

10, 
10. 
10. 
26, 
13. 

13, 
13. 
10. 
13. 
9. 

18. 
14, 
12. 
12. 

19. 
19, 
21, 
18, 
24, 

28. 

18. 

8. 

50. 

S, 

6. 
34. 
IS, 
29, 
10. 

10. 
10. 

io. 

10. 
29. 

15, 

s. 

21. 

S. 
7. 


Code 

No. 


Rale 


2.301. 

.  .20. . 

2302. 

.  .20.. 

2303. 

.  .20. . 

2320. 

.  .61.. 

2348. 

.78.. 

2.349. 

1.28.. 

2350. 

.78.. 

2351. 

.61.. 

2301. 

.19.. 

2302. 

.36.. 

2380. 

.32.. 

23S2. 

.32.. 

23S3. 

.34.. 

23S4. 

.32.. 

2386. 

.  .30. . 

2387. 

.32.. 

23S8. 

.30.. 

2390. 

.32.. 

2402. 

.62.. 

2410. 

1.48.. 

2413. 

.82.. 

2415. 

.82., 

2416. 

.53., 

2417., 

.75. . 

2501., 

.21.. 

2502.. 

.21.. 

2503.. 

.21.. 

2520.. 

.21.. 

2521.. 

.21.. 

2530. . 

.33.. 

2531.. 

.21.. 

2532., 

.21.. 

2533., 

.19., 

2534,, 

.21.. 

2535., 

.21., 

2536., 

.35.. 

2551., 

.21.. 

255-2., 

.19., 

2553., 

.21.. 

2554., 

.21.. 

Min. 
Prem. 

6. 

6. 

6. 
10. 
12. 

17. 
12. 

10. 
6. 

8. 

7. 

I' 

7. 
7. 

7. 
7. 

7. 
10. 
19. 

12. 
12. 

9. 
12. 

6. 

6. 

6. 
6. 
6. 

7. 

6. 
6. 
6. 
6. 
6. 

S. 
6. 
6. 
({. 

6. 


I 


410    INSURANCE  PRINCIPLES  AND  PRACTICES 


XXVI 
COMPENSATION  SCHEDULE  RATE 

PENNSYLVANIA  Elevator  Definitions 

(4)  The  following  items  only,  apply  to  cranes  having  manu- 
ally operated  travel  and  hoist: 

166. 

(5)  The  following  items  only,  apply  to  I-Beam  or  monorail 
hoists  with  cage  or  cab: 

163,  164,  165,  166. 

(6)  Locomotive  Cranes  shall  not  be  considered  under  this 
section. 

170  Elevators 

Definitions 

(1)  Elevator 

An  elevator  is  a  hoisting  mechanism,  either  manually  or 
mechanically  operated,  equipped  with  a  car,  cage  or 
platform,  which  moves  in  guides  in  a  vertical  direction 
and  which  is  designed  to  carry  passengers  or  freight.  This 
definition  does  not  apply  to  dumbwaiters. 

(2)  Passenger  Elevator 

Passenger  elevator  is  an  elevator  used  primarily  for  the 
canying  of  persons. 

(3)  Freight  Elevator 

Freight  elevator  is  an  elevator  used  primarily  for  the 
carrying  of  freight. 

(4)  Elevator  Shaftway 

Elevator  shaftway  shall  mean  any  shaft  opening  in  which 
an  elevator  car  operates. 

(5)  Elevator  Machinery 

Elevator  machinery  shall  mean  all  mechanism  and  equip- 
ment directly  used  in  the  operation  of  the  elevator. 

(6)  Elevator  Car 

Elevator  car  shall  mean  the  car,  cage  or  platform  which 
is  operated  in  an  elevator  shaft  or  hoistway. 

(7)  Dumbwaiters 

A  dumbwaiter  is  a  hoisting  mechanism  used  for  trans- 
ferring freight  only  and  constructed  as  follows: 

Not  more  than  nine  (9)  square  feet  platform  area,  car 
not  over  four  (4)  feet  high,  and  not  used  to  carry  over 
five  hundred  (500)  pounds. 


APPENDIX  411 


XXVI— Continued 

Blevalors  PENNSYLVANIA 

(8)  Hand  Hoists 

A  hand  hoist  (whip  hoist)  is  a  hoisting  mechanism  manu- 
ally or  mechanically  operated  without  a  car,  cage  or 
platform  operating  in  guides  and  is  generally  operated 
through  one  or  more  floor  openings  inside  the  building 
or  near  a  wall  opening  on  the  outside  of  a  building. 

(9)  Hand  Power  Elevators 

Hand  power  elevators  are  elevators  which  are  raised  and 
lowered  entirely  by  manual  effort. 

(10)  Auxiliary  Power  Attachments 

Elevators  equipped  with  grip  or  other  auxiliary  power 
attachments  shall  be  considered  as  power  elevators. 

171  Charge  for  each  Elevator  where  there  are  any  Beams, 
Floors  or  other  projections  in  Shafts  which  form  a  Shear  with 
floor  of  passing  Elevator. 

1.0  point  under  item  119. 
Rule 

(1)  This  item  shall  not  apply  to: 
Hand  Power  Elevators 

Hand  Power  Sidewalk  Elevators. 

Definition 

(2)  A  shear  in  a  shaftway  is  formed  by  an  ofTset  or  projection 
such  as  floors,  supports,  beams,  bolts  or  other  fixed  con- 
struction so  located  that  an  article  extending  two  (2) 
inches  beyond  the  edge  of  th,-  car  platform  may  strike  it 
when  the  car  js  ascending. 

Standard 

(3)  Sides  of  elevator  shafts  shall  be  smooth  and  free  from 
projecting  objects. 

(4)  Beams,  floors  and  other  projections,  forming  a  shear 
with  floor  of  passing  elevator,  shall  be  beveled. 

(a)  Substantial  beveled  metal  or  wood  plates  shall  "be 
installed  under  all  projections,  extending  into  shaft 
to  within  two  (2)  inches  or  less  of  fioor  of  passing  car. 


4.12    INSURANCE  PRINCIPLES  AND  PRACTICES 

XXVII 

FINANCIAL  STATEMENT  OF  A  COMPENSATION  MUTUAL 

Premium   Income    $       985,031.08 

Assets        1,578,997.82 

Liabilities  * '  V 1,085,661.09 

Surplus     493,336.73 

Loss    Ratio       ^9.37% 

Expense  Ratio     ^'^•^^2' 

Earnings       39.68% 

COMPARATIVE  EXPERIENCE  BY  FISCAL  YEARS  ENDING  JUNE  30 

Premiums        Expense 
Assets  JVrhtcn  Ratio       Loss  Ratio        Surplus         Dividend 

1  $    90,747.77       $144,280.03         27.40%         36.78%       $  39,446.08  25% 

2  186,918.06         184,603.84         17.69%         56.19%  64,621.92  25% 

3  327,257.26         341,195.30         16.08%         72.23%  78,300.16  10% 

4  1,130.648.05         777,362.32         15.75%         47.06%         310,000.00  *20% 

5  li578,997.82         985,031.08         14.71%         49.37%         493,336.73  t27^% 

*First  half, 
f  Second  half. 

XXVIII 

STATEMENT  OF  FINANCIAL  CONDITION  OF  A  STATE  WORK- 
MEN'S COMPENSATION  INSURANCE  FUND 


ASSETS  Dec.  31, 1916  Doc.  31, 1917 

Investments ■.       $402,823.00   $1,904,370.32 

Cash  on  Deposit 56,713.72  85,957.49 

Net  Deferred  and  Uncol- 
lected Premiums 22,466.28  85,143.67 

$572,003.00    $1,375,471.4$ 

Interest  Accrued 6,935.51  10,780.47 

Gross  Payroll  Audit  Addi- 
tions          163.510.32        401,015.05 

Gross  Merit  Rating  Addi- 
tions   8,918.08  14,430.47 

TOTAL $751,566.91    $1,802,597.47 

LIABILITIES 

Reserve  for  Claim  Losses 

to  Maturity. $404,825.55       $971,425.13 

Reserve  for  Possible  De- 
preciation on  Investments  25.000.00 

Reserve    for     Re-insurance 

Premium  Payable 2,377.35  12,234.72 

Reserve  for  Outstanding 
Accounts  Payable 

Reserve  'or  Dividends 

Payable 93,162.04        135,659.57 

TOTAL  RESERVES.      $500,364.94   $1,144,319.42 

Premiums  Paid  in  Advance  $22,857.97  $21,220.34 

P.iyroll  Audit  reductions..  42,020.18  41,013.75 

Merit  Rating  Reductions..  41,962.52  63,525.94 

Catastrophe  Surplus....  68,049.84  144,707.84 
Fluctuation     Surplus . . 

General  Surplus 76,004.28  882,541.27 

TOTALS. ; . .'. ;'. . «750,259.73  »1,797,328.56 


Dee.  31, 1918 

$2,772,583.58 
107.095.02 


Dec.  31, 191d 

$3,985,105.19 
256.677.00 


108,011.98         142,984.00 


$2,987,690.66 

35,002.15 

616,275.45 

10,910.37 


$4,384,668.25 

60,793.18 

387,580.05 

23,762.63 


$3,649,878.53   $4,846,802.10 


$1,355,717.00 

75.000.00 

6,122.00 

5,311.36 

296,233.96 


$1,771,218.6* 

lOO.OOO.OO 

18.081.98 

6,376.23 

328.199.08 


1,738.384.32   $2,222,875.19 


$14,931.67 
44,366.25 
135,573.99 
268,355.69 
600,000.00 
948,266.71 


$138,217.11 

104,875.09 

66,607.69 

368,436.00 

600,000.00 

1,445,791.08 


$3,649,878.63  $4,846,802.10 


APPENDIX  413 


XXIX 


EXTRACT  FROM  PAMPHLET  OF  PHILADELPHIA   CONTRIBUTION- 
SHIP  FOR  INSURANCE 

At  the  time  the  policy  is  issued,  the  insured  makes  a  cash  deposit  with 
the  company,  according  to  the  rate  upon  the  amount  insured,  which  on  dwell- 
ings varies  from  2%  to  3J/2%  dependent  upon  construction  and  location — 
whether  in  the  city  or  country.  No  further  payments  of  any  kind  are  required, 
the  interest  earned  by  the  company  on  the  deposit  taking  the  place  of  annual 
premiums  on  term  insurance.  This  saves  the  insured  all  trouble  of  renewals 
and  eliminates  the  danger  of  having  the  policy  lapse. 

If  the  policy  is  cancelled  after  five  years,  either  by  the  assured  or  by  the 
company,  the  deposit  money  is  returned  in  full  (prior  to  five  years  there  is  a 
deduction  of  5%  or  10%). 

When  a  loss  comes  the  company  either  rebuilds  or  settles  on  a  cash  basis — 
but  \n  either  event  the  policy  is  not  affected  (unless  the  loss  be  total)  but 
continues  in  force,  without  additional  deposit,  for  tlie~full  amount  as  before  the 

fire.  ~  ~~~ 

When  the  deposit  money  has  remained  with  the  company  for  ten  years,  it 
participates  in  any  dividends  that  may  be  declared,  which,  for  the  past  sixteen 
years,  have  been  at  the  rate  of  10%  per  annum. 


^1 


414    INSURANCE  PRINCIPLES  AND  PRACTICES 

XXX 

NEW  YORK  STANDARD  FIRE  POLICY 

STOCK   COMPANY 


Amount  $. 
and  of 


T?ale. 


TVcmmm  $. 

In  Coiisideralion  oi"  the  Stipulations  herein  named 


Dollars  Pi-eniium 


does  insure- 


and  legal  representatives,  to  the  extent  of  the.actiial  _ca§h_  value  (ascertained  with  proper  deductions  for 
depreciation)  of  the  property  at  the  time  of  loss  or"~3arnage,  but  not  exceeding  the  amount  which— it— wo«Hd 
cost  to  repair  or  replace  the  same  with  material  of  like  kind  and  quality  within  a  reasonable  time  after  such 
loss  or  damage,  without  allowance  for  any  increased  cost  of  repair  or  reconstruction  by  reason  of  any  ordinance 
or    law    regulating   construction    or    repair    and    without    compensation    for    loss    resulting    from    interruption    of 

business  or  manufacture,  for  the  term  of..— - - — - 


from  the - day  of.. 

to  the- - day  of.. 


.19 at  noon, 

.19 at  noon,- 


against  all  DIRECT  LOSS  AND  DAMAGE  BY  FIRE  and  by  removal  from  premises  endangered  by  fire,  except 

as  herein  provided,  to  an  amount  not  exceeding, _ Dollars 

to  the  following  described  property  while  located  and  contained  as  described  herein,  or  pro  rata  for  five  days 
at  each  proper  place  to  which  any  of  the  property  shall  necessarily  be  removed  for  preservation  from  fire, 
but  not  elsewhere,  to  wit: 


This  policy  is  made  and  accepted  subject  to  the  foregomg  stipulations  and  conditions  and  to  the  stipulations 
and  condil^ons  printed  on  the  back  hereof,  which  are  hereby  made  a  part  of  this  policy,  together  with  such 
other    provisions;    stipulations    and    conditions    as    may    be    endorsed    hereon    or    added    hereto    as    herein    provided. 


Jn  Ullnpfla  BJtjPrrof,    this  Company  has  executed  and  attested  these  presents,  but  this  policy  shall  not  bf 
iralid  until  countersigned  by  the  duly  authorized  Agent  of- the  Company  at 


SECRETARY. 

Countersigned  at 

this day  cf 


PRESIDENT. 


19. 


..Agent 


APPENDIX 


415 


XXX— Continued 


I  __      .    _....„       This  enure  policy  shill  bt  void  il  Iht  insured 
Z  „*"j!;„!r  -""^  "i"   <:on««led   or    miirepresenled   »oy    ma- 

'*"  Icrlal   fact  or  circumstance  concerning  this 


•cnKDon.  etc. 


4  infcurance  or  the  subject  thereof;  or  in  case  of  any  fraud  or  false 

5  swearing  by  the  insured  touching  any  matter  relating  to  this 

6  insurance  or  Ihp  subject  thereof,  whether  before  or  after  a  loss 


-,   .  .  ,  This  p'-ilicy  shall  not  cover  accounts,  bills. 

UninnwiDie  currency,  Heeds,  evidences  of  debt,  monev. 

„      *"     .    ■ ^.    notes  or  securities,   nor,  unless  specitncaUy 

Excepted  prop«rty.  „,^^j    ^^^^^^    ,^    writing,    bullion,    manu- 
scripts, mechanical  drawings,  dies  or  patterns 
H         dc  not  This  Company  shall  not  be  liable  for  loss 

covercl- 


or  damage  caused  directly  or  indirectly  by 
invasion,    insurrection,    not,    civil    war    oi 

15  commotion,  or  military  or  usurped  power,  or  by  order  of  any 

16  civil  authority;  or  by  theft;  or  by  neglect  of  the  insured  to  use 

17  all  reasonable  means  to  save  and  preserve  the  property  at  and 

18  4fter   a   fire   or   when    the   property    is   endangered    by    lire    in 

19  neighboring   premises 

20  This  entire  policy  shiU  be  void,  unless  otherwise  provided 

21  bjr  iXTcement  in  writing  added  hereto, 

Z2  r\  I,'       ti-  (a)  if  the  intercsiof  the  insured  be  other  than 

23  wwnennip,  etc.         unconditional  and  sole  ownership,  or  \h)  if 

24  the  subject  of  insurance  be  a  building  on  ground  not  owntd  by 

25  the  insured  in  fee  simple;  or  (c)  i(,  with  the  knowledge  ol  tht 

26  insured,  foreclosure  proceedings  be  commenced  or  notice  given 

27  of  sale  o(  any  property  insured  hereunder  by  reason  of  any  mort- 

28  gage  or  trust  deed,  or  (J)  if  any  change,  other  than  by  the  death 

29  of  an  insured,  take  place  in  the  interest,  title  or  possession  of 

30  the  subject  of  insurance  (except  change  of  occupants  without 

31  increase  of  hazard),  or  (e)  if  this  policy  be  assigned  before  a  loss 

32  Unlees   otherwise  provided  by  agreement  in  writing  added 

33  hereto  this  Company  shall  not  be  bable  for  loss  or  damage 

34  occurring 

*3S  <-.  u  (*)  while  the  insured  shall  have  any  othei 

36  Other  insurance.       (-oniracl  of  insurance,  whether  valid  or  not 

37  on  property  covered  in  whole  or  in  part  by  this  policy;  or 

38  (b)    while    the   hazard   is   increased   by  any 

39  Increase  of  hazard,   means  within  the  control  or  knowledge  ol 

40  the  msured,  or 

41  p       ■  (c)  while  mechanics  are  employed  in  building 

42  Kepairs,  etc.  altering  or  repairing  the  described  premises 

43  beyond  a  period  of  fifteen  days;  or 

44  _      I     .  (d)  while  illumuialing  gas  or  vapor  is  gener- 

45  '•"P'o^'^^s,  2,jj   Qj,    ,),j   described    premises,   or   while 

46  ^*^'  ^^^'  (any  usage  or  custom  to  the  contrary  not- 

47  withstanding)   there  is  kept,  used  or  allowed  on  the  described 

48  premises  firew-orks.  greek  hre.  phosphorus,  explosives,  benzine. 

49  gasolene,  naphtha  or  any  other  peiroleum  product  of  greatei 
M)  inflammability  than  kerosene  oil.  gunpowder  exceeding  twcnty- 

51  five  pounds,  or  kerosene  oil  exceeding  five  barrels,  or 

52  p  _.     -  (e)  if  the  subject  of  insurance  be  a  manufac- 

53  ''"'°''"*-  tunng   .establishment     while     operated     in 

54  whole  or  in  part  between  the  hours  of  ten  P    M    and  live  .\    M,. 

55  or  while  it  ceases  to  be  operated  beyond  a  period  of  ten  days;  or 

56  ,,  (f)  whOe  a  described  building,  whether  in- 

57  ijno'cupancy.  (,nded  for  occupancy  by  owner  or  ten.ml,  is 

58  vacant  or  unoccupied  beyond  a  period  of  ten  days,  or 

59  p_„i.,:-.  (g)    by   explosion   or   lightning.   imUss^e 

60  "-."Plfo"'  ensue,  and.  in  that  event,  for  losS'biTtfm 

61  LighUimg.  jg^  j^y  (,^^  ^„ly  . ■ 

62  ,..    ....  _     .        _     "Vnless  oiTierwne  provided  by  agreement  in 

^3  l,hattel  mortgage.     ^,.r„,ng    jj^^j    hereto    this    Company    shall 

64  not  be  liable  for  loss  or  damage  to  any  properly  insured  here- 

65  under  while  incumbered  by  a  chattel  mortgage,  and  during  the 

66  time  of  such   incumbrance  this  Company   shall   be   liable  only 

67  for  loss  or  dajnage  to  any  other  property  insured  hereunder. 

68  Tf.ii   „/  i,,,:ij:_„         If  a  building,  or  any   material  part   thereof 

69  ""  *"  omiQing.       j^,,  „^^p,  ^^  ,,,^  result  of  fire,  all  insurance 

70  by  this  policy  on  such  building  or  its  contents  shall  immediately 

71  cease. 

^^  AHH^H  riaiifl^a  "^1^^  extent  of  the  application  of  insurance 

7j  «aaea  v,iauies.  ^^^^^  ^^^^  policy  and  of  tlie  contribution  to 

74  be  made  by  this  Company  in  case  of  loss  or  damage,  and  any 

75  other  agreement  not   inconsistent  with  or  a  waiver  of  any  of 

76  the  conditions  or  provisions  of  this  policy,  may  be  provided  for 
T!  by  agreement  jn  writing  added  hereto. 


78  yf^^^f  No  one  shall  have  power  to  waive  any  pro- 

79  ■  vision  or  condition  of  this  policy  except  such 

80  as  by  the  terms  of  this  policy  may  be  the  subject  of  agreement 

81  added  hereto,  nor  shall  any  such  provision  or  condition  be  held 

82  to  be  waived  unless  such  waiver  shall  be  in  writing  added  hereto. 
a  nor  shall  any  provision  or  condition  of  this  policy  or  any  for- 

84  fciture  be  held  to  be  waived  by  any  requirement,  act  or  proceed- 

85  ing  on  the  pan  of  this  Company  relating  to  appraisal  or  to  any 

86  examination  herein  provided  for;  nor  shall  an\-  privilege  or  per- 

87  mission  affecting  the  insurance  hereunder  exist  or  be  claimed  by 

88  the  insured  unlcs  granted  herein  or  by  rider  added   hereto 

5?  CancellatioB  This  policy  shall  be  cancelled  at  any  time 

o?  of  policy.  ***  *^^  request  of  the  insured,  in  which  case 

^'  '       .  the  Company  shall,  upon  demand  and  sur 

92  render  of  this  policy,  refund  the  excess  of  paid  premium  above 

93  the  customary  short   rate»  for  the  expired  tune      This  policy 

94  may  be  cancelled  at  any  time  by  the  Company  by  giving  to  the 

95  insured  a  five  days'  written  notice  of  cancellation  with  or  with 

96  out  tender  of  the  excess  of  paid  premium  above  the  pro  rate 

97  premium  for   the  e.vpircd  time,  which  exve.ss.  if  not  tendered 

98  shall  be  refunded  on  demand      Notice  of  cancellation  shall  state 

99  that  said  excess  premium  (if  no:  tendered)  will  be  refunded  on 
100  demand. 


"'  Pro  rata  Uabilitv  ^'''*  Company  shall  not  be  liable  lor  a 
Q2  rioi»i«  u»uiuiy.       greater  proportion  of  any   loss  or  damage 

03  than    the    amount    hereby    insured    shall    bear    to    the    whole 

04  insurance    covering    the    property,    whether    valid    or    not    and 

05  whether   collectible   or  not 

"6  Noon.  ^*"    word      noon"    herein    means    noon    of 

07  standard  time  at  the  place  of  loss  or  damage 

08  Mortgage.  "  '°**  °'  ■''"lage  is  made  payable,  in  whole 
0<)  interests                      °^  '"  P'"-  '°  '  mortgagee  not  named  herein 

10  as  the  insured,  this  policy  may  be  cancelled 

11  as  to  such   interest   by   giving  to  such   mortgagee  a  ten   days' 

12  written  notify  pi  c;^ficj-haiion      LVuii  fjllurf  or  111*  insured  tj 

13  KHder  proof  ol  loss  such  morigagee  shall,  as  if  named  as  insurea 

14  hereunder,  but  within  sixty  days  after  nonce  of  such  failure,  ren- 

15  der  proof  ol  loss  and  shall  be  subject  to  the  provisions  hereof  as 

16  to  appraisal  and  times  ol  payment  and  of  bringing  suit    On  pay- 

17  mem  to  such  mortgagee  ol  any  sum  for  loss  or  uamage  here- 

18  under.  ifthisCluncanysha^l^UjniJtiat  as  to  the  mortgjiar^pf 

19  owner,  Btr-ttSbility"eXlil*d,  'it  shall.  .Jo 'JTTf  exKiit  ufsuchpay- 

20  meiM  be  subrogate!)  to  the  mortgagee's  right  of  recovery  and 

21  claim  upon  the  collateral  of  the  mortgage  debt,  but  without 
21  impairing  the  mortgagee's  right  to  sue.  or  it  may  pay  the  mort- 
Zi  gage  debt  and  require  an  assignment  thereof  and  oi  the  mortgage. 

24  Other  provisions  relating  to  the  interests  and  obligations  of  such 

25  mortgagee  may  be  added  hereto  by  agreement  in  writing 

-S,  Requirements  in       "^^^  '"*""''  shall  giveinjjne44aM-not.ce.  in 
case  of  loss  writing,    to   this   Com(I>ny.   ot  Iny  toss   or 

28  'damage,  protect  the  properly  from  further 

29  damage,  forthwith  separate  the  damaged  and  undamaged 
JO  personal  property,  put  it  in  the  best  possible  order,  furnish  a 
Jl  complete  inventory  of  the  destroyed,  damaged  and  undamaged 
J2  property,  staling  the  quantity  and  cost  of  each  article  and  the 

33  amount   claimed   thereon;   and.  the  insured  shall,  within  sixty 

34  days  after  the  fire,  unless  such  time  is  extended  in  writing  by 

35  this  Con\pany,  render  to  this  Company  a  proof  ol  loss,  signed 

36  and  sworn  to  b'y" iHe'insured:  slating  the  knowledge  and  belief 
}>7  of  the  ins  ired  as  to  the  following  ithe  time  and  origin  of  the  fire, 

38  fKe  interest  of  the  insured  and  ol  all  others  in  the  properiy,-thc 

39  cash  value  of  each  item  thereof  and  the  amount  of  loss  or  damage 

40  thereto,  fall    incumbrances    thereon.  ;alT   other   contracts   of  m- 

41  surance.' whether  valid  or  not,  coCenng  any'' of  said  pr'opc'ri^  | 

42  any  changes  in  the  title,  use,  occupation,  location,  possessicfn,  or  ' 

43  exposures  of  said  property  since  the  issuing  of  this  policy.  Vy 

44  whom  and  for  what  purpose  any  building  herein  described  and 

45  the  several  parts  thereof  were  occup^jed  at  the  lime  of  fire,  and 

46  shall  furnish  a  copy  of  all  the  descriptions  and  schedules  in  all 

47  policies  and  it  required.'VtfTTTTe'g  pta*/-s  jiitt-specrfieaitfttisrOf  any 
48'huircling,"  fixtures   or  hiachincry   destVoyed   or   damaged.     The 

49  insured,  as  often  as  may  be  reasonably  required,  shall  exhibit 

50  to  any  person  designated  by  this  Company  all  that  remains  of 

51  any    property    herein    d.»jcribcd.    and    submit    to   examinations 

52  under    oath    by    any    person    named    by    this    Company,    and 

53  subscribe    the    same;    and.    as    often    as    may    be    reasonably 

54  required,  ^all  produce  for  examination  ail  books  ol  account, 

55  bills,  invoices,  aiij  i5!hei   VViu'cK^r;.   rr  cemffftj  C'uples  llieTcuf. 

56  H-ewf?fH»a-l»-be-4ost.  at  such  reasonable  lime  attifl""(ifl^"ce  as  may 

57  be  designated  by  this  Company  or  its  representatives,  and  shall 

58  permit  extracts  and  copies  thereof  to  be  made 

59  A__„:„i  In  case  the  insured  and  this  Company  shall 

60  "PP'*'»3'-  fail   to  agree  as  to   the   amount  of  loss  or 

61  damage,   each    shall,   on    the    writien   demand   of   either,  select 

62  a  competent  and  disinterested  appraiser  The  appraisers 
63"^IialI    first    select   a   competent    and    disinterested   umpire;  and 

64  failing   for   fifteen   days   to  agree   upon   such   umpire   then,   on 

65  request  of  the  insured  or  this  Company,  such  umpire  shall  be 

66  selected  by  a  ^udge  of  a  court  of  record  in  the  state  in  which 

67  the    property    insiired    is    located       The   appraisers    shall    then 

68  appraise   the   loss  and   damage   stating  separately  sound  value 

69  and   loss  or  damage  to  each   item,  and  failing  to  agree,  shall 

70  submit    their   differences    only,    to   the    umpire      An    award    m 

71  writing,  so  itemized,  of  any  two  when  filed  with  this  Company 

72  shall    determine    the    amount    of    sound    value    and    loss    or 

73  damage.     Each  appraiser  shall  be  paid  by  the  party  selecting 

74  him  and  the  expenses  of  appraisal  and  umpire  shall  be  paid 

75  by  the  parties  equally. 

5^  Company's  '',  ^^^'I   ""  "P'^O"''   with   this  Company  to 

-     options  '*       ^   ■  "''  *"^  part,  of  the  articles  at  the 

"8     P  '  agreed    or    appraised    value,    arid    also    to 

79  repair,  rebuild,  or  replace  the  property  lost  or  damaged  with 
RO  other  of  like  kind   and   quality    within   a   reasonable   time,   on 

81  giving    notice    of    its    intention    so    to    do    within    thirty    days* 

82  •Sfrer    rhe    receipt    of   the    progf    of    loss   herein    required;  Juit- 
there  can  bc^no  abandonment  to  this  Coin* 


Abandonment. 
When  loss 


g;  payable. 


pany  of  any  property 

*THe  a'mount  of  loss' or  damage  lor  which 
this  Company  may  be  liable  shall  be  pay- 
able  sixt^days  after  proof  of  loss,  as  herein 
f*.S  piovided,   is  received    by^his^'CmiTpa'riy^ri'T'ascertaTnment   of 

89  the  loss  or  dam..ge  is  madc_jut.h£r  by  agreement  between  the 

90  insured    and    tins    Cpnipany    cxpres's^d'  in*\vrrtTng    or    by    tlj4 

91  filing  with  this  Company"  oF  an  aNvafd  -Li  ]io*#i:\,  pro\-ideJ 
'"Suit.  ^°  ^"'^  *"^  action   on   this  policy,   for   the 
9-5          '                              recovery  of  anv  claim,  shall  be  sustainable 

94  in  any  court  of  law  or  equity  unless  all   the  requirements  of 

95  this   policy   shall    have    been    complied   with,    nor    unless   com- 
''ft'menced  within  twelve  months  next  after  the  fire. 

"  Subrogation.  Xhh  Company  may  require  from  the  insured 

93  *  an    assignment    of    all     right    of    recovery 

99  against  any  party  for  loss  or  damage  to  the  extent  that  pay- 
200  mem  therefor  is  made  by  this  Company. 


416    INSURANCE  PRINCIPLES  AND  PRACTICES 

XXX— Continued 
ASSIGNMENT  OF  INTEREST  BY  INSURED 


The  interest  of - „ - _ 

covered  by  this  Policy  is  hereby  assigned  to ._ 

subject  to  the  consent  of  THE  INSURANCE  COMPANY,  NEW  YORK. 


......as  owner  of  the  property 


(SifSAture  of  the  lomrcd) 


Dated„ 


..I9„..„.. 


CONSENT  BY  COMPANY  TO  ASSIGNMENT  OF  INTEREST 


THE  INSURANCE  COMPANY.  NEW  YORK,    hereby    consents    that   the  interest  of 

._ . „ _ „ as  owner  of  the  property 

covered  by  this  Policy  be  assigned  to 

_..- - - — ».-,,.,;,^^«..,.,,. Agent. 


Dated.. 


„...19.. 


No.  of  Policy-^ , 

No.  of  Renewal 

Amount  Insured „ _ 


Date  of  Cancellation 

"       Policy     • 
Time  in  force 
Premium  Paid 


YEAR 


MO. 


DAY 


Earned  at rate  $^ 

Returned,  9- 


I»  Pxo  Rata,  State  RxasOn  Why. 


Receipt  for  Return  f^remium 

To  be  signed  by  the  Assured 

THE  INSURANCE  COMPANY 


-Agency—.. 


19- 


IN  CONSIDERATION  OP 


_ ...Dollars 

return  premium,  receipt  of  which  is  hereby  acknowledged,  this  Policy  is 
hereby  cancelled  and  surrendered  to  the  Company 


Assured: 


APPENDIX  417 

XXXI 

REDUCED  RATE  CLAUSE  (CO-INSURANCE) 

In  consideration  of  the  reduced  rate  of  premium  for  which  this  Policy  is 
written  the  standard  80  per  cent.  Co-insurance  Clause  of  the  State  of  New 
Jersey  is  attached  to  and  made  a  part  of  this  Policy. 

NEW  JERSEY  STANDARD  PERCENTAGE  CO-INSURANCE  CLAUSE 

If  at  the  time  of  fire  the  whole  amount  of  insurance  on  the  property  cov- 
ered by  this  Policy  shall  be  Less  than per  cent,  of  the  actual  cash  value 

thereof,  this  Company  shall,  in  case  of  loss  or  damage,  be  liable  for  only  such 
portion  of  such  loss  or  damage  as  the  amount  insured  by  this  Policy  shall  bear 
to  the  said per  cent,  of  the  actual  cash  value  of  such  property. 

If  this  Policy  be  divided  into  two  or  more  items,  the  foregoing  conditions 
shall  apply  to  each  item  separately. 

Attached  to  and  forming  part  of  Policy  No of  the   

Agency  of  The Insurance Company, 

Agent 


XXXII 

MORTGAGEE   CLAUSE 
N.  Y.  and  Neiv  Jersey  Standard 
Loss,  or  damage,  if  any.  under  this  Policy,  shall  be  payable  to. 


as mortgagee,    [or   trustee]    as    interest   may   appear,    and 

this  insurance,  as  to  the  interest  of  the  mortgagee  [or  trustee]  only  therein 
shall  not  be  invalidated  by  any  act  or  neglect  of  the  mortgagor  or  owner  of 
the  within  described  property,  nor  by  any  foreclosure  or  other  proceedings  or 
notice  of  sale  relating  to  the  property,  nor  by  any  change  in  the  title  or  owner- 
ship of  the  property,  nor  by  the  occupation  of  the  premises  for  purposes  more 
hazardous  than  are  permitted  by  this  Policy;  Provided,  that  in  case  the  mort- 
gagor or  owner  shall  neglect  to  pay  any  premium  due  under  this  Policy,  the 
mortgagee   [or  trustee]   shall  on  demand  pay  the  same. 

Provided  also,  that  the  mortgagee  [or  trustee]  shall  notify  this  Company 
of  any  change  of  ownership  or  occupancy  or  increase  of  hazard  which  shall 
come  to  the  knowledge  of  said  mortgagee  [or  trustee]  and  unless,  permitted 
by  this  Policy,  it  shall  be  noted  thereon  and  the  mortgagee  [or  trustee]  shall, 
on  demand,  pay  the  premium  for  such  increased  hazard  for  the  term  of  the  use 
thereof;  otherwise  this' Policy  shall  be  null  and  void. 

This  Company  reserves  the  right  to  cancel  this  Policy  at  any  time  as 
provided  by  its  terms,  but  in  such  case  this  Policy  shall  continue  in  force  for 
the  benefit  only  of  the  mortgagee  [or  trustee]  for  ten  days  after  the  notice  to 
the  mortgagee  [or  trustee]  of  such  cancellation  and  shall  then  cease,  and  this 
Company  shall  have  the  right,  on  like  notice,  to  cancel  this  agreement. 

Whenever  this  Company  shall  pay  the  mortgagee  [or  trustee]  any  sum 
for  loss  or  damage  under  this  Policy  and  shall  claim  that,  as  to  the  Mortgagor 
or  owner,  no  liability  therefor  existed,  this  Company  shall,  to  the  extent  of 
such  payment,  be  thereupon  legally  subrogated  to  all  the  rights  of  the  party 


418    INSURANCE  PRINCIPLES  AND  PRACTICES 

to  whom  such  payment  shall  be  made,  under  all  securities  held  as  collateral 
to  the  mortgage  debt,  or  may  at  its  option,  pay  to  the  mortgagee  [or  trustee] 
the  whole  principal  due  or  to  grow  due  on  the  mortgage  with  interest,  and 
shall  thereupon  receive  a  full  assignment  and  transfer  of  the  mortgage  and 
all  such  other  securities;  but  no  subrogation  shall  impair  the  right  of  the 
mortgagee    [or  trustee]    to   recover   the   full   amount  of    claim. 

Attached  to  and  forming  part  of  Policy  No issued  at 

Agency  of  The Insurance  Company, 

Dated       

Agent 


XXXIII 

MORTGAGE   CLAUSE  WITH   FULL   CONTRIBUTION 

N.  Y.  and  Neiv  Jersey  Standard 

Same  as  above  with  the  addition  of  the  following  clause: 
In  case  of  any  other  insurance  upon  the  within  described  property  this 
Company  shall  not  be  liable  under  this  policy  for  a  greater  proportion  of  any 
loss  or  damage  sustained  than  the  sum  hereby  insured  bears  to  the  whole 
amount  of  insurance  on  said  property,  issued  to  or  held  by  any  party  or  parties 
having  an  insurable  interest  therein,  whether  as  owner,  mortgagee  or  other- 
wise 

XXXIV 

EXCESS  FLOATER 

On   merchandise,    chiefly own,    or    held    by in    trust   or 

on  commission,  or  on  joint  account  with  others,  or  sold  but  not  removed,  and 
not  under  the  protection  of  a  Marine  Policy,  while  contained  in  all  or  any 
of  the  brick  or  stone  storage  warehouses,   and  while  in  transit  in  or  on  any 

of  the  streets,  depots,  yards  or  wharves  in  the  City  of ,   and  in  any 

ship  or  vessel  in  the  port  of  said  city,  subject  to  the  following  conditions: — 

REDUCED  RATE  AVERAGE  CLAUSE 

In  consideration  of  the  reduced  rate  at  which  this  policy  is  written,  it  is 
expressly  stipulated  and  made  a  condition  of  this  contract  that  this  company 
shall  be  liable  for  no  greater  proportion  of  any  loss  than  the  amount  hereby 
insured  bears  to  the  actual  cash  value  of  the  property  described  herein  at  the 
time  when  such  loss  shall  happen,  nor  for  more  than  the  proportion  which  this 
policy  bears  to  the  total   insurance  thereon. 

If  this  policy  be  divided  into  two  or  more  items,  the  foregoing  conditions 
shall  apply  to  each  item  separately:  and  if  two  or  more  buildings  or  their  con- 
tents be  included  in  a  single  item,  the  application  of  the  provision  as  to  special 
inventory  or  appraisement  shall  be  limited  to  each  building  and  its  contents. 

EXCEPTION   CLAUSE 

It  is  understood  and  agreed  that  goods  on  which  the  insured  shall  have 
a  specific  insurance  are  not  covered  by  this  policy  except  so  far  only  as  relates 
to  any  excess  of  value  above  such  specific  insurance,  and  that  this  policy  shall 
be  liable  only  for  its  proportion  of  any  loss,  on  such  property,  which  exceeds 
such  specific  insurance. 


APPENDIX  419 

XXXV 

HOUSEHOLD  FORM 

On  Household  and  Kitchen  Furniture  of  every  description,  useful  and 
ornamental,  Beds,  Bedding,  Linen,  Wearing  Apparel,  Printed  Books,  Pictures, 
Paintings  and  their  frames.  Sculpture,  Works  of  Art,  Silver  and  Plated  Ware, 
China  and  Glassware,  Mirrors,  Musical  and  Scientific  Instruments,  Watches, 
Jewelry,  Sewing  Machines,  Gas  Fixtures,  Family  Stores,  Tools,  Bicycles  and  all 
other  Sporting  Implements,  Awnings  contained  in  or  attached  to  the  Building 
and  all  articles  generally  used  in  housekeeping,  the  property  of  the  Assured,  or 
any  member  of  his   family,  while  contained   in   Brick  Building   as   a   dwelling 

situate  No Street,  Philadelphia 


In  case  of  loss  or  damage  to  Paintings,  Statuary  or  Works  of  Art  no  one 
subject  to  be  valued  at  more  than  the  actual  cash  price  paid  for  the  same  by 
Assured. 

Privilege  of  other  insurance  without  notice  until  required;  to  make  addi- 
tions, alterations  and  repairs  and  this  policy  to  cover  in  same;  to  use  gas  and 
kerosene  oil  for  light,  heat  and  cooking;  for  building  to  remain  unoccupied 
during  any  part  of  the  year,   and  to  keep   and   use   not  exceeding  one   quart 

of   gasoline   or   benzine    for   cleaning   purposes without   prejudice   to 

this  policy. 


XXXVI 

LIGHTNING  CLAUSE 
(Excluding  Damage  to  Electrical  Apparatus.) 

This  policy  shall  cover  any  direct  loss  or  damage  caused  by  lightning 
(meaning  thereby  the  commonly  accepted  use  of  the  term  lightning  and  in  no 
case  to  include  loss  or  damage  by  cyclone,  tornado,  or  wind-storm),  not  ex- 
ceeding the  sum  insured,  nor  the  interest  of  the  insured  in  the  property,  and 
subject  in  all  other  respects  to  the  terms  and  conditions  of  this  policy.  PRO- 
VIDED, however,  that  if  there  shall  be  any  other  insurance  on  said  property 
this  company  shall  be  liable  only  pro  rata  with  such  other  insurance  for  any 
direct  loss  by  lightning,  whether  such  other  insurance  be  against  direct  loss  by 
lightning  or  not;  and  provided  further  that,  if  dynamos,  wiring,  lamps,  motors, 
switches  or  other  electrical  appliances  or  devices  are  insured  by  this  policy, 
this  company  shall  not  be  liable  for  any  loss  or  damage  to  such  property  re- 
sulting from  any  electrical  injury  or  disturbance,  whether  from  artificial  or 
natural  causes,  unless  fire  ensues,  and  then  for  the  loss  by  fire  only. 

Permission  is  granted  under  this  policy  for  the  use  of  electric  current 
after  Certificate  of  approval  has  been  issued  by  the  Philadelphia  Fire  Under- 
writers Association  and  while  it  remains  unrevoked  by  said  Assocation. 

Attached  to  Policy  No The Insurance  Company 

of  Philadelphia.  Secretary. 


420    INSURANCE  PRINCIPLES  AND  PRACTICES 

XXXVII 
LOSS  PAYABLE  CLAUSE 
Loss,  if  any,  payable  to Mortgagee,  as 

......interest  may   appear,    subject   nevertheless   to   all   the   conditions   of  this 

Policy. 

Attached  to  and  forming  part  of  Policy  No of  The Insurance 

Company,  issued  to at  the  Agency 

Date  of  Endorsement 19 

Agent 

XXXVIII 
GASOLINE,  ETC.,  PERMIT 

Permission  is  hereby  given  to  keep  and  use  not  more  than quarts 

of in  any  one  day,  it  being  warranted  by  the  insured  that,  in  con- 
sideration of  the   reduced   rate   at  which  this  policy  is  issued,  not  more  than 

one  quart  of will   be  kept  or  used   by  the  insured  in   any  one 

story  of  the  building  in  any  one  day;  that  the will  be  kept  in  and 

used  from  approved  safety  cans  (or  pots)  and  kept  outside  of  the  building 
at  night. 

XXXIX 

SPRINKLER  LEAKAGE  FORM 

Does    insure for    the    term    of from    the day 

of 19 ,  at  noon,  to  the day  of 19 

at   noon,   to   an   amount  not   exceeding 

dollars,  to  wit:  Against  all  direct  loss  or  damage  caused  by  the  accidental 
discharge  or  leakage  of  water  from  the  automatic  sprinkler  system,  including 
tanks  supplying  it.  except  as  hereinafter  provided,  in  or  on  the  buildings  now 
erected  and  occupied  wholly  or  partly  by  the  assured  (whether  the  accident 
occurs  in  the  portion  occupied  by  the  assured  or  not),  described  and   located 

as  follows 

And  the  company  shall  be  liable  under  this  contract  for  all  direct  loss  or 
damage  sustained  by  the  assured  occasioned  by  such  discharge  or  leakage, 
provided  same  is  caused  by  any  accident  (including  freezing),  and  applying 
to  all  property,  real  or  personal  owned  by  the  assured,  or  to  the  property  of 
others  held  by  the  assured  in  trust  or  on  commission,  or  sold,  but  not  removed, 
and  for  which  the  assured  is  legally  liable,  while  situate  upon  the  premises 
above  described,  but  this  company  shall  not  be  liable  for  loss  or  damage  occa- 
sioned by  such  discharge  or  leakage,  when  such  discharge  or  leakage  is 
caused  by  fire,  lightning,  earthquake,  explosion,  invasion  of  foreign  enemies, 
civil  commotions,  riots,  any  military  or  usurped  power,  order  of  civil  authority, 
or  any  fraudulent  act  of  the  assured.  It  is  further  understood  and  agreed  that 
the  entire  liability  of  this  company  under  this  contract  shall  under  no  circum- 
stances exceed  the  sum  insured,  for  any  loss,  claim,  or  damage  whatsoever, 
and  that  this  company  shall  not  be  liable  under  this  contract  for  any  loss  or 
damage  to  the  automatic  sprinkler  system  itself. 


APPENDIX  421 


XL 

BUSINESS  INTERRUPTION  INDEMNITY 

Use  aiid  Occupancy  Insurance. 
On  th«  U8C  and  occupancy  of  ..,....„ff..,...,, ., «...,-i 


situate TottTi  of , — ^ — 

state  of and  occupied   for ..,.„'....'..... ..■,..-.„i..-.„ _..„ 

The  word  'Inisincss"  wlicrcvcr  used  iu  this  contract  shall  lie  cpusidered  and  held  to  have  tlio  follow  lug  meaning  accord- 
ing to  the  class  of  property  insured: 

(a)   In  a  MANDFACTuniNo  property:    "The  production  of  goods.". 

(I))   In  a  MKRCANTILE  property:     "The  sale  of  t;oods." 

(e)   In  OTiiKU  ci,ARsi:s  of  property:    "The  carrying  on  of  the  business  operations  usual  to  the  class." 

The  word  "day,"  liowcver  modified,  wherever  used  in  this  contract  shall  be  held  to  cover  a  period  of  twenty-four  (24) 
hours. 

If  the  said  Iniilding  ,  of  machinery  or  erpiipineiil  or  stoilc  cont.nined  tlicreiu  be  dcftroycd  or  damaged  by  fire  occurrinp; 
d'.iring  llie  life  of  this  policy  so  as  lo  nceessilale  n  lolal  or  parliil  suspension  of  hiisinoss,  this  Com[inny  shall  be  li.ihlc  under 
(his  policy  for  the  actual  lo.^is  Eusljiined  of  net  pnifiis  ou  Ihe  hii.sincss  which  is  Iherehy  prevented,  and  for  such  fixed  chnrTCs  and 
expenses  as  must  iieces.<arily  fonliuue  during  a  tol.i!  or  ji.irtia' suspension  of  husinc-s,  for  not  exceeding  such  length  of  time 
as  shall  be  rc(|uircd  with  the  exercise  of  due  diligence  and  dispatch  to  rebuild,  repair  or  replace  such  part  of  said  huildine  , 
and  machinery  and  equipment  and  stock  as  may  be  destroyed  or  daniuged,  comnteiuing  with  the  date  of  the  fire  and  not  limited 
l)y  llic  date  of  expiration  of  this  policy,  under  the  following  terms  and  conditious.  to  wit: 

During  the  time  of  a  tof.a!  suspension  of  business,  liability  under  this  policy  shall  not  exceed  tlie  following  amounts  fo^ 
each  business  day  of  such  suspcusion. 

.For  cacl>  business  day  rrora..„.^....„......,„.._..,.,»«..lo  noon  the  following...„...r,.„j,,,.,...,,... (incl.)     $  , ,„,„ 

For  cadi  business  day  from.._.v »-.— ..c- 'o  nomi  "ic  following „».,.,.,..„„,.,.„._.. .(incl.)     $ — i 

For  each  business  day  from .'., lo  noon  the  following .,^..„i..,..,....(incl.)     $ ..i..... i, 

For  each  business  day  frorrL to  noon  the  following ,.., (incl.)     $ ., 

For  each  liusiness  day  from .;. to  noon  the  following ., (incl.)     $ ., 

For  each  business  day  from to  noon  Uie  following , (incl.)     $ ,. « 

For  each  business  day  from : to  noon  the  following , (incl.)     $ _..„ „ 

For  '■ach  busincsS  day  from ^...to  noon  the  foUoHdug (incl.)     $ * 

For  each  business  day  from to  noon  the  following (inol.)     $ -i ..» 

For  each  tmsincss  day  from _ to  noon  the  following (incl.)     $ n. 

For  each  business  day  from to  noon  the  following _ (incl.)     $ ,. ..,• 

For  each  business  day  from ,. to  noon  the  following _ (incl,)     $ j,.» 

For  each  business  day  from to  noon  the  following (iacL)     % : „, 

During  the  time  of  a  partial  suspension  of  business,  the  per  diem  liability  under  this  policy  shall  not  exceed  that  pro- 
.porlion  of  the  per  diem  Ii;i])ility  which  would  have  been  incurri'd  by  a  total  sn.-pcnsion  which  Uie  decrease  in  production  (or 
business)  bears  to  the  full  daily  production  (or  business)  at  the  time  Of  the  fire. 

It  is  a  condition  of  this  lusurance  that  the  daily  production  (or  business)  at  the  time  of  the  fire  shall  be  baaed  upon 

the  average  daily  production  (or  business)  of  all  plants  or  properties  herein  described  for  the. ,„. days 

of  full  oijcraliou  next  preceding  the  fire. 

Liability  ^hereunder  shall  not  exceed  the  amount  of  insurance  by  this  policy  nor  a  greater  proportion  of  any  loaa  than 
the  insurance  hereunder  eholl  bear  to  all  insurance,  whether  valid  or  pot,  covering  in  any  manner  the  loss  insiired  against  by 
tJus  policy. 


422    INSURANCE  PRINCIPLES  AND  PRACTICES 


XL — Continued 

It  ft  a  eondilion  of  this  insurance  that  the  assured  shall  not  be  entitled  to  compeiwation  oh  accounf  of  delay  «liich  may 
bo  occasioned  by  any  ordinance  or  law  regulating  construction  or  repair  of  buildings,  or  by  the  euspension,  lapse  or  cancellatJQil 
o(  ^y  license,  or  for  any  other  consequential  damage. 

It  is  a  condition  of  this  insurance  that  if  covering  on  replacement  of  stock  in  a  manufacturing  property!  '•' 

First— That  no  liability  is  assumed  on  account  of  damage  to  tlie  finished  product  or  for  the  tin^e  reqlired  to  repf633ffl 
aOj  finished  product  which  may  be  damaged. 

Second — That  liability  for  curtailpient  of  production  due  to  damage  to,  or  loss  of,  raw  materials  shall  be  limited  to 
that  period  of  time  for  which  the  damaged  or  destroyed  raw  materials  would  have  furnished  operatmg  conditions  for  the  plant. 
No  liability  shall  exist  on  this  account,  unless  or  until  actual  curtailment  of  production  shall  have  occurred  through  the 
assurcd's  inability  to  procure  suitable  materials  to  take  the  place  of  those  damaged  or  destroyed. 

It  is  a  condition  of  this  insurance  that  as  soon  as  practicable  after  any  loss,  the  assured  shall  resume  complete  or  partial 
operation  of  the  property  herein  described  and  shall  make  use  of  other  property,  if  obtainable,  if  by  so  doiuj  the  amount  of 
loss  hereunder  will  be  reduced,  and  in  the  event  of  the  assured  continuing  business,  in  whole  or  in  part,  at  some  other  location 
or  using  other  property  during  the  time  occupied  in  repairing  or  reconstructing  the  property  named  herein,  the  net  profits  so 
earned  shall  be  applied  to  the  reduction  of  the  loss  and  adjustment  shall  be  made  as  provided  herein  for  partial  losses. 

Surplus  machinery  or  duplicate  parts  thereof,  equipment  or  supplies,  surplus  or  reserve  stock,  which  may  be  owned, 
controlled  or  used  by  the  assured  shall,  in  the  event  of  loss,  be  used  in  placing  the  property  in  condition  for  the  resumption  of 
business. 

In  case  the  assured  and  this  Company  are  nnable  to  agree  as  to  any  question  affecting  the  amount  of  loss  under  this 
policy,  the  same  shall  he  determined  by  appraisers  in  the  mamier  provided  by  the  policy  to  which  this  form  is  attached,  the 
provisions  of  which  policy  shall  govern  in  all  matters  pertaining  to  this  insurance,  except  as  herein  otherwise  provided. 

Other  concurrent  insurance  permitted. 

Permission-  is  granted  under  this  policy  for  the  use  of  Electric  Current  after  certificate  of  approval  has  been  issued 
by  the '  Fire  Underwriters'  Association  and  while  it  rema.ina  unrevoked  by  6ai4  Association. 


Permit  for  Alterations- and  Repairs. — In  addition  to  the  privilege  contained  in  the  printed  conditions  of  this  policy 
perraiseioii  is  hereby  given  to  make  ordinary  alterations  and  repairs  in  the  within-described  premises,  but  this  shall  J^gt  bo 
held  to  include  the  reconstruction  or  the  enlargement  of  the  same. 

Permit  to  Cease  Operation. — Permission  is  hereby  granted  to  cease  operation  not  eiceediiig  sixty  (60)  cons^mtive 
days,  in  addition  to  the  period  of  ten  (10)  days  granted  under  the  printed  conditions  of  this  policy,  but  this  shall  not  Ija  held 
to  annuf  the  privilege  to  cease  operations  for  a  period  of  ten  (10)  days  at  any  one  time. 

Warranty:  In  consideration  that  no  additional  premium  is  charged  for  this  permit  to  cease  operations,  it  is  war- 
ranted by  the  insured  and  made  a  condition  of  the  insurance  that  all  fire  extinguishing  appliances  and  apparatus  installed  on 
said  premises  shall  be  maintained  in  complete  working  order  and  that  one  or  more  watchmen  shall  be  continuously  on  duty 
day  and  night  during  the  time  named  in  this  permit,  and  be  required  to  make  hourly  rounds  of  inspection,  recording  same  oa 
watchman's  time  recording  clock. 

Lightning  Clause. — Except  as  provided  in  the  Electrical  Exemption  Clause  below,  this  policy  shall  cover  use  and 
occupancy  loss  caused  by  lightning  (meaning  thereby  the  commonly  accepted  use  of  the  term  lightning,  and  in  no  case  to 
include  loss  or  damage  by  cyclone,  tornado  or  wind-storm)  not  exceeding  the  sum  insured,  nor  the  interest  of  the  assured  in 
the  property.  Provided,  however,  if  there  shall  be  any  other,  use  and  occupancy  insurance  on  said  property,  this  Company 
shall  be  liable  only  pro  rata  with  such  other  insurance  for  any  use  and  occupancy  loss  by  lightning,  whether  such  insurance  to 
§gainst  loss  by  lightning  or  not. 

Electrical  Exemption  Clause. — It  is  a  special  condition  of  this  policy  that  this  Company  shall  not  be  liable  foil 
Any  use  and  occupancy  loss  resulting  from  damage  to  dynamos,  exciters,  lamps,  switches,  motors  and  other  electrigal  appliwjcei 
or  devices  caused  by  electrical  currents,  whether  artificial  or  natural,  including  lightning. 

Attached  to  and  made  a  part  of  Policy  No _. of  the. _ ,....,..«i>,.nn<iinnn„>»<d'»<i<.-^ 

Inaurance  Company  of — _ _ 

,,.„..,.%... _ ~.......v.".~,.^~-i.<=^v.=„«. Agent. 


APPENDIX  423 

XLI 
BINDER 

Agency,  Date,   

Effective  at  noon  on  the  above  date,  and  subject  to  the  terms  and  conditions 
of  the  Standard  Insurance  Policy,  we  have  bound  the  Insurance  Com- 
pany,                                                                               , 

for Dollars    ($ ),  covering  against  loss  or 

damage  by  fire  and  lightning  to  the  following  described  property: 

Name  of  Assured, 

Term  for  which  Policy  will  be  issued, , 

Location :  Map  Page ,  Blk Street  No 


>•••••• 


It  is  understood  and  agreed  that  this  binder  continues  for  a  period  of  Ten 
Days  from  date  of  issue,  or  until  the  issue  of  a  Standard  Policy  covering  said 
property,  or  until  twelve  o'clock  noon  of  the  second  business  day  after  written 
notice  of  cancellation  to  the  assured,  or  to  the  broker  placing  this  insurance, 
whichever  of  said  three  events  first  occurs. 

Remarks    


Agent 

XLII 

CANCELLATION  NOTICE  TO  MORTGAGEE  FOR  NON-PAYMENT  OF 

PREMIUM 

(^^  I,  the  undersigned,  do  hereby  certify  that  the  Original  of  this  Copy  was 
registered  by  me  to  the  party  named  in  this  notice,  on  the day  of 

,  19 


The Insurance  Company,  

Agency  at 

Date ,  ig. 


Because   of   non-payment   of   the   premium   of  $ ,   we   cancel   the 

Mortgage  Agreement  attached  to  and  made  a  part  of  our  Policy  No , 

Issued  to on ,   19 , 

covering  on   at ,  and 

made  payable  to  you  as  mortgagee  (or  trustee),  in  the  event  of  loss,  and  hereby 
give  you  ten  (10)  days'  notice  thereof,  as  provided  by  the  terms  of  said  mortgagee 
clause  and  the  Policy. 

Please  take  notice  that  on  the day  of ,  19 , 

at  twelve  o'clock  noon,  or,  if  that  date  is  not  ten  (10)  days  from  the  receipt 
hereof,  then  at  the  expiration  of  ten  (10)  days  from  its  receipt,  the  said  Agree- 
ment will  cease  to  be  in  force. 

Yours  truly, 

THE INSURANCE  COMPANY, 

Per 

Agent 


^24    INSURANCE  PRINCIPLES  AND  PRACTICES 

XLIII 

RENEWAL  RECEIPT 

Amount,  $ Premium,  $ 

The  Insurance  Company  of   

Insured 

In  Consideration  of Dollars  being  the  premium 

on Policy  No is  hereby  renewed 

and  continued  in  force  for to  wit,  from  the 

day  of 19 ,  at  noon  until  the 

day  of 19 ,  at  noon. 

Dated 


THE 


.  INSURANCE  COMPANY, 

Per 

Agent 


XLIV 


SHORT  RATE  TABLE  FOR  ONE  YEAR  POLICIES 


Percentage 

Percentage 

Percentage 

Time 

to  be  Charged 

Time 

J 

'.0  be  Charged 

Time            to 

1  be  Charged 

Days 

or  Retained 

Days 

or  Retained 

Days              ( 

or  Retained 

1 

2 

19 

16 

135 

56 

2 

4 

20 

17 

150  (5  mo.) 

60 

3 

5 

25 

19 

165 

66 

4 

6 

30  (1 

mo.) 

20 

180  (6  mo.) 

70 

5 

7 

35 

23 

195 

73 

6 

8 

40 

25 

210  (7  mo.) 

75 

7 

9 

45 

27 

225 

78 

8 

9 

SO 

28 

240  (8  mo.) 

80 

9 

10 

55 

29 

255 

83 

10 

10 

60  (2mo.) 

30 

270  (9  mo.) 

85 

11 

11 

65 

33 

285 

88 

12 

11 

70 

36 

300  (10  mo.) 

90 

13 

12 

75 

37 

315 

93 

14 

13 

80 

38 

330  (11  mo.) 

95 

15 

13 

85 

39 

345 

98 

16 

14 

90  (3 

mo.) 

40 

360  (12  mo.) 

100 

17 

15 

105 

46 

18 

16 

120  (4 

mo.) 

50 

APPENDIX  ^  425 

XLV 
AGREEMENT  FOR  SUBI^1ISSI0^  TO  APPRAISERS. 


|t  t5  htetbB  afltt'fl  by - -^ 

of  the  first  part,  and  the.. - Ins.  Co.  of 

or  companies  whose  name  or  names  are  signed  hereto,  of  .the  second  part,  each  for  itself  and  not  jointly,  they 

having  failed  to  agree  as  to  the  amount  of  loss  or  damage  by  fire,  .which  occurred  on  the... — 

day  of - »90 to  property  described  in  policy  No.. issued  to  said  party 

of  the  first  part  by  the  party  of  the  second  part',  which  policy  isTiereby  referred  to  and  made  a  part  of  this 
agreement,  that — - — -• • ■  ■ 


(together  with  a  third  person  to  be  first  appointed  by  them,  as  required  by  said  policy  of  insurance,  who  shall 
act  as  umpire  upon  matters  of  difference  only)  shall  appraise  and  estimate  the  actual  cash  value  of,  and' the 
loss  and  damage  by  fire  to,  the  property  as  enumerated  in  schedule  or  description  herewith,  which  loss  or 
damage  shall  be  ascertained  or  estimated  according  to  such  actual  cash  value  with  proper  deduction  for 
depreciation  however  causetl,  and  shall  in  no  event  exceed  what  it  would  then  cost  the  assured  to  repair  or 
replace  the  same,  which  appraisement  and  estimate  by  them,  or  any  two  of  them,  in  writing,  as  to  the  amount 
of  such  value  and  loss  or  damage  shall  be  binding  on  both  parties,  it  being  understood  that  the  appointment 
is  of  binding  effect  only  so  far  as  regards  the  actual  cash  value  of,  and  loss  or  damage  to,  said  property. 

The  property  on  which  sound  value  and  damage  is  to  be  estimated  and  appraised  is  described  in  the 
policy  above  mentioned  as  follows: 


Goods  damaged  by  removal  shall  be  specified  separately. 

It  is  expressly  understood  and  agreed  that  in  entering  into  this  agreement  the  said  Insurance  Company 
shall  not  be  held  to  have  waived  any  provisions  or  conditions  of  this  policy,  or  any  forfeiture  thereof,  by  any 
requirement,  act  or  proceedings  on  its  part  relating  to  the  appraisal. 

'SBiltncss  our  hands  at _ i 

\      — " 

this. day  of. — , 1 90  ) 


426    INSURANCE  PRINCIPLES  AND  PRACTICES 


XLY— Continued 


APPOINTMENT  OF  AN  UMPIRE. 


We,  the  undersigned,  do  hereby  select  and  appoint.. 


ss  Umpire,  to  decide  upon  matters  of  difference  only,  as  provided  for  in  the  within  agreement. 


^ ^  190 


[  Appraisers. 


DECLARATION  OF  APPRAISERS. 


State  of — 
County  of . 


We,  the  undersigned,  do  solemnly  swear  that  we  have  no  interest  as  employees,  relatives,  creditors  or 
otherwise  in  either  of  the  parties  to  the  foregoing  Agreement,  and  that  we  will  act  with  strict  impartiality  in  the 
discharge  of  our  duties  as  Appraisers,  rendering  an  award  to  the  best  of  our  knowledge,  skill  and  judgment. 

Witness  our  signatures  hereto. 

>•  Appraisers. 


...Umpire. 


Stibscribed  and  sworn  to  before  me  this- 


-day. 


.190 


AWARD  OF  APPRAISERS. 


We,  the  undersigned,  pursuant  to  the  within  appointment,  do  hbreby  certify  that  we  have  truly  and 
conscientiously  performed  the  duties  assigned  ns,  agreeable  to  the  foregoing  stipulations,  and  have  appraised  and 

determined  the  actual  cash  value  of  said  property  on  the - -day  of    - 190 

and  the  actual  damage  thereto  by  the  fire  on  that  day.  to  be  as  follows,  to  wit; 


Valua  before  the  FliY. 


On _ _ 

On .:.- 

On ...:n.= 

Total  amount  of  award.. 


Damage. 


$  — 


as  per  Schedule  herewith. 

Witness  our  hands,  this  ... 


.  day  of 


.190. 


II 


Appraisers. 
.Umpire. 


APPENDIX  427 

XLVI 

SWORN  STATEMENT  IN  PROOF  OF  LOSS 


POLICY 

No 

AGENCY  AT 

ComtrSttrut 


AMOUNT  OF  POUCY 

DATE  OF  EXPIRATION 
19_ 


BY  YOUR  POLICY  OF  INSURANCE  ABOVE  DESCRIBED 


YOU  INSURED 

(hereinafter  called  the  Assured),  according  to  the  terms  and  conditions  contained  therein,  the  written  portion 
thereof  and  all  endorsements,  transfers  and  assignments  thereon,  being  as  follows : 

$ 


(Copies  of  all  endonements.  transfertv  assigntnenta  and  all  the  deacriptions  and  schedules  m  all  other  Policies  will  be  furnished  on  demand.) 


A  fire  occurred  on  the _day  of„ 

and  belief  of  Assured,  originated 


,   19 ,  which,  to  the  be^  knowledge 


The  property  thus  insured  belonged  to_ 


and  no  other  person  or  party  had  einy  intere^  therein  except- 


The  building  was  occupied  for  the  following  purposes : 


and  for  no  -other  purpose  whatever. 

The  whole  value,  the  whole  amount  of  loss,  and  the  whole  insurance,  on  above  described 
property,  is  as  follows,  viz. ; 


WHOLE  VALUE 

WHOLE  LOSS 

WHOLE  INSURANCE 

AMOUNT  NAMED  IN 
THIS  POLICY 

AMOUNT  CLAIMED 
UNDER  THIS  POLICY 

Item  of  Policy 

....           ,  Item  of  Policy     

Item  of  Policy , 

, 

Other  Items  of  Policy 

TOTALS 

Total  Amount  Claimed  of  this  Company  under  above-named  Policy, 

1^ 

The  said  fire  did  not  originate  by  any  a<5l,  design  or  procurement  on  the  part  of  assured,  of  this 
affiant ;  nothing  has  been  done  by  or  with  the  privity  or  consent  of  the  assured  or  this  affiant,  to  violate  the 
conditions  of  the  Policy,  or  render  it  void ;  no  articles  are  mentioned  herein  or  in  tinnexed  schedules  but  such 
as  were  in  the  building  deimaged  or  de^royed,  and  belonging  to,  and  in  possession  of  the  said  assured  at  time 
of  said  fire;  no  property  saved  has  been  in  any  manner  concealed,  and  no  attempt  has  in  any  manner 
been  made  to  deceive  this  Company  as  to  said  loss. 

Any  other  information  that  may  be  required  will  be  furnished  on  call,  and  considered  a  part  hereof. 

If  is  expressly  tuidersfood  and  agreed,  that  the  furnishing  of  this  blank  to  the  assured  or  the  preparing 
of  Proofs  by  an  adjuster,  or  any  agent  of  this  Company  is  an  act  of  courtesy  and  is  not  a  waiver  of  any  rights 
of  tbis  Company. 

MitttTBB hand  at— ) 


this.- day  of 

State  of ... 


I9_ 


Assured 


County  of 


^rrBUnally  optirarFb  before  me,  the  day  emd  date  above  written. 


Signer  of  the  foregoing  ^atement,  who  made  solemn  oath  to  the  truth  of  same,  and  that  no  materijj  ia€t  is 
withheld  of  which  this  Compciny  should  be  advised. 


Notary  Public    Justice  of  the  Peace. 


(SEAL) 


428    INSURANCE  PRINCIPLES  AND  PRACTICES 

XLVI— Continued 
SCHEDULE  A 


J*e     Of     COMPAW 


SCHEDULE   B 

STATEME!<T   Or   INSURANCE    AND    APPORTIONMENT   OF    LOSS 


(NiuWj  run 


State  of- 


CQUNflY  OF_ 


CERTIFICATE  OF  MAGISTRATE  OR  NOTARY  PUBLIC 


►M. 


r>r 


living  nearest  the  property  hereinbefore  described,  hereby  certify  that  I  am  not  intereiled  in  the  loss  or  claim  above  set 
forth,  either  as  a  creditor  or  otherwise,  nor  related  to  the'insurcd  oj  sufferers;  that'  I  have  .examined  the  circum^ances 
attending  the  fire,  or  damage  alleged,  and  that  I  am  well  acquainted  with-4he  character  and  circum^ances  of  the  insured, 

and  do  verily  believe  that ha. by  misfortune,  '^nd  without  fraud  or  evil  practice,  su^ained  loss  and 

damage  on  the  property  insured  to  the  amount  of —..., ; ■ - Dollars. 


3In  UrpBtimony  IHIjprrof,  I  have  hereunto  set  pay  hand  and  seal  this T-^ay  of 


A.  D.  19- 


This  Certificate  is  in  all  cases  te  be  made  hy  the  Magi^talc  sr  Notary  Public  living  nearest  the  place  of  Are. 


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APPENDIX 


429 


XLVII 
DAILY  REPORT 


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DIAGRAM 


Arrets  »31  plttse  wKwcrAtL  these  qnettions. 
EXPOSURES. 


Jlortb^ 

South. 

East 

— „ 



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OCCUPANCY  OF  THE  PREMISES. 
M  Policy  covprs  store  bulldisg,  lUle  cliii  cf  icercluaditt  kept. 

Basement — ->  -  -    —    — — — ■■— -■ 

1st   Sicry, «.„._™^ — . — -■^■-^■■.-   -■     .  ■ 


l.VVhcn  was  building  erccied?, liaichaU^-, 


is  it  in  eooj 


R»»r.»rk» .■ 


2  TIow   Lighted? ., . , 

4.  Do  all  the  Stove  Pipct  discharge  into  substantial  brick  Chimneys?. — -. 

5.  Have  you  persooally  and  carefully  inspected  the  Stoves,  Furnaces,  Pipci. 

Flues  and  Chimneys' —_— -> - — — 

C  If  so,  do  you  consider  tlicm  sale? .  .. ..— .. 

7.  What  is  ihc  present  Cash  V^lue  of  Building  above  foundation?  g—— - 

8  What  is  the  Value  of  Stock?  $. - 

9^  T*- thfrfropcrty  mortgaged? • For  what  amoonl?  $.-   i. — — . 


10   Wli:*t  Is  th:-  vr.lur  o\  the  whole  property  roorleaged?  $ — — . 

II.  Do  yoj  fully  rccommtrd  the  risk  as  being  free  frqin  all  finoBcial  or  moral 

liazard? ,_..^ — _.  , ,         .   .   ■■■      —  ■  i- 

ir  How  long  has  the  assured  rcfidsd  in  )0(v  phcc?,,..^^    .^ — .. _,,• 

13«Arc  iSe  preml:^?^  nov7  occbpitJ  ar>d  prodtioivt?.^  ..   ■  ■.     ..i    — .  — -. 

\%  How  fw  to  n^*ajfi»  T'utlic  hfe  hydrant? , .,. —  — ■- — — 

•  II  To  ocarest  Cre  company? — , ■  ..■  .- ■  —  .  — -  —  .  ■      ^  ..— .  ^- 


430    INSURANCE  PRINCIPLES  AND  PRACTICES 


XLVIII 
MONTHLY  REPORT 


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STANDARD 
ACCOUNT  CURRENT 

ADOPTED  BY 

THE  NATIONAL  BOARD  OF 

UNDERWRITERS,  1917 

APPROVED  BY  THE 
N*tion«t  AtiocUtioD  of  Iniuraoc*  Afenl^  1917 


Month  of . 


-19- 


THE 

INSURANCE  COMPANY 

NEW  YORK 


•-20-2&a-U  iiil 


APPENDIX 


431 


XLIX 
AGENTS'  CONTRACT 


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I        III 


432    INSURANCE  PRINCIPLES  AND  PRACTICES 


MAPS  OF  FIRE  UNDERWRITERS'  ASSOCIATIONS 


%uu  of  Nft/Yorn 


N[W  YORK 


PENNSYLVANIA 


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APPENDIX 


433 


LII 

BASIC  TABLE,  DEAN  SCHEDULE 
100 — Protection 

Height                                      Class    Class  Class  Class  Class  Class  Class 

12  3  4-  iVi  5  6 

1  story    $0.54     $0.61  $0.69  $0.78  $0.86  $0.94  $1.00 

2  stories    57         .64  .73  .82  .91  .99  1.05 

3  stories    60         .67  .76  .86  .95  1.04  1.10 

4  stories    63         .72  .81  .92  1.01  1.10  1.17 

5  stories    69         .78  .88  

6  stories    76      

Increase  for  each  additional  story      .12         .12  .12  .12  .12  .12  .12 

Decrease  if  no  basement 03        .03  .04  .04  .04  .05  .05 


LIII 


CONTENTS  TABLE,  DEAN  SCHEDULE 

Third-Class  Protection 

Location  oj  Contents                      Dl      DlYz      Ds  D2yz  D3  DsVz  D4 

Basement    $0.26     $0.33     $0.40  $0.49  $0.57  $0.66  $0.75 

Ground  floor 18         .25         .31  .39  .47  .56  .64 

Second    floor    26         .33         .40  .49  .57  .66  .75 

Third  floor 31         .39         .46  .55  .64  .74  .83 

Fourth  floor 36         .44         .52  .61  .70  .80  .90 

Fifth  floor  and  over 41         .49         .57  .67  .77  .88  .98 


LIV 


OCCUPANCY  TABLE,  DEAN  SCHEDULE 


/ 

195.  Bolt,  Nut  and  Screw  Stocks 5% 

196.  Bonnet  and  Hat  Frame  Factories 15% 

1.  Additional  labor,  power,  heat,  etc.  (C.  3J4) 

197.  Book  Bindery   (no  printing) 25% 

1.  Additional  labor,  power  heat,  etc.   (C.  3J^) 

2.  Book  Bindery  with  Printing.     See  Printing. 

198.  Book  Binders'  Supplies 5% 

199.  Book  and  Stationery  Stocks 5% 

200.  Bootblacking  Parlors   3% 

201.  Boot  and  Shoe  Stocks   (retail) 5% 

202.  Boots    and    Shoes    (wholesale),    including    Rubber 

Goods    3% 


2 

10% 
20% 

40% 


3 

D2 
D3 

D3 


10% 

D2 

10% 

D3 

>  >  >  > 

D2 

10% 

D2 

5% 

Dl 

434    INSURANCE  PRINCIPLES  AND  PRACTICES 

LV 

CALCULATION  OF  A  BUILDING  RATE— DEAN  SCHEDULE 

Brick  Building 

60  Table — Third  Class  Protection 

Basis — four  stories,  no  basement   ($0.49-.02) $0.47 

Area — 4,000  square  feet,  four  floors  14%  less  one-tenth  or  1%  for 

interior  wall 13% 

Walls — sides  are  16-12-12-12  average  13  in.,  should  be  20-16-16-12, 

average  16  in.  deficient  each  3  in.,  at  3% ^  6% 

One  wall  party,  add 4% 

Parapets — one  deficient  in  height 4% 

Iron  and  Glass  store  front  first  story,  over  25  feet 6% 

Ceilings  and  walls  wood  sheathed — 2  floors 6% 

Skylight — one  70  square  feet,  not  standard 4% 

Floorways   grade    "B"   with   two   "below    a"   openings    each    floor 

(6%x3)     18% 

Partitions — one  wooden  lath  and  plaster,  basement  and  first  floors, 

between  tenants 6% 

Exterior    Attachments  —  one    metal-clad    frame    roof    house    over 

elevator    5% 

Occupancy   (assumed)    48% 

Total  charges  added  and  extended 120%        .56 


Occupied  building  rate $1.03 

LVI 
CALCULATION  OF  A  BUILDING  AND  CONTENTS  RATE- 
DEAN  SCHEDULE 

Municipal  Protection — Class   3 

Building:   4  stories  and  basement,  basis $0.49 

Charges 

Area:   50  x  100  feet  equals  5,000  feet,  5  floors 20% 

Walls :    (2)  each  deficient  3  inches 6% 

One  party  wall  not  standard 4% 

Parapets:    one  deficient  in  height 4% 

Front  wall  on  first  story  all  of  iron  and  glass 6% 

Wooden  sheathed  ceiling  and  walls  on  first  floor 3% 

Skylight:  one  70  sq.  ft.  not  standard;  heavy  glass  in  wooden  frame       4% 
Floor  Openings:  one  open  elevator  and  one  open  stairway  each  floor 

Floors  grade    B  B  B  B 

Retinue  grades    — a  — a         — a         • — a 

Number  of  openings 2  2  2  2 

Charges +6%     +6%      +6%      +6%=         24% 

Metal-clad  roof  house  over  elevator 5% 

Occupancy  charge  (see  detail) 272% 


Total  percentage  charges  added,   applied  to  basis   rate   and 

extended    348%      1.71 


Occupied  building  rate $2.20 


APPENDIX  435 


INl— Continued 

Deduct  for  standard  fire  escape 2% 

Deduct  for  approved  equipment  of  fire  extinguishers 5% 

Total  credits 7%        .15 


Building  rate   $2.05 

Exposures — none    •  •  •  • 

Final    building  rate 2.05 

Contents   rate   2.64 

Contents  grade  D3  on  bst,  1st,  2d,  3d  and  5th  floors. 

Add  the  differentials  as  follows  57  +  47+  57  +  64  +  70  =  2.95. 

Divide  by  number  of  floors,  four  and  basement  (5)^  59  cents. 

Building  rate  $2.05  plus  contents  differential  .59  =  $2.64. 


DETAIL  OF  OCCUI-ANCY 

12  3 

John  Buck  &  Co.,  Candy  Factory 25%      40%       D3 

Average  number  hands,  125. 

Additional  labor,  120  hands,  CZVz 63% 

Boiler  and  engine — high  pressure  boiler  with  brick  stack; 
concrete  floor — in  separate  room  with  brick  walls  and 
joisted  ceiling  not  cut-off.  Boiler  grades  as  "medium" 
furnace,  for  which  charge  in  open  is  70%;  70%  x  80% 
for  location  equals 56% 

Coke-heated  candy  furnaces  (4). 

Charge  for  one  furnace  as  "low"  25%;  25%  x%  as  addi- 
tional to  boiler  furnace  =  5%  and  multiply  by  four  for 
number  of  furnaces,  equals 20% 

Kettles  connected  with  candy  furnaces   (4)   charge  for  one 

30%  increased  %  for  additional  kettles  equals 48% 

Gas  engine,  in  open 20% 


Total  first  column  charges 232% 

Add  charge  in  column  2 40% 


Total  occupancy  charge 272% 


436    INSURANCE  PRINCIPLES  AND  PRACTICES 

LVII 
RIOT  AND  CIVIL  COMMCmOM  POUCY 


Amount,  9 


Does  Insure 


Rat» 

3n  CmtatifraJum  of  the  stip\d^$^ 


lum,  9 


from  the  day  of 

to  the  day  of 

AGAINST  ALL  DIRECT  LOSS  OR  DAMAGE 

(1)  Riot;  (2)  Insurrection;  (3)  Civil  Commotion  I 
of  the  foregoing;  (5)  Explosion  occurring  from 

from  such  explosion)  whether  origioatiiig  on  the  pren 

Except  as  hereinafter  provided,  to  an  amoust 


to  the  following  described  property  while 


tiamed  and  of 
Dollars  Premium, 


19       ,  at  noon, 
19       ,  at  noon, 

D  BY  ANY  OF  THE  FOLLOWINQi 

ike;  (4)  Explosion  directly  caused  by  any 
above  described  (excluding  fire  rraultii^ 
ed  or  elsewhere. 


DoOaxs 
tained  as  described  herein,  and  not  elsewhere,  to  wit: 


This  policy  is  made  and  accepted  subject  to  the  foregoing  stipulations  and  conditions,  together  with  such  other  pro- 
visions, agreements  or  conditions  as  may  be  indorsed  hereon  or  added  hereto,  and  no  officer,  agent,  or  other  representative 
of  this  Company  shall  have  power  to  waive  or  be  deemed  or  held  to  have  waived  such  provisions  or  conditions  unless  such 
waiver,  if  any,  shall  be  written  upon  or  attached  hereto,  nor  shall  any  privilege  or  permission  affecting  the  insurance  under 
this  pohcy  exist  or  be  claimed  by  the  insured  unless  so  written  or  attached. 


Provisions  required  by  law  to  be  stated  in  this  policy. — ^This  pohcy  is  in  a  stock  corporation. 

3n  BilttTBfl  ffil|frenf.jSis  Company  has  esecuted  and  attested  these  presents;  but  this  polin^^ll 
Talid  until  countereigned  ^  the  duly  authorized  manager  or  agent  of  the  Company  at %r^ 


not  be 


Secrelary 


_,  IMs- 


c 


PraideiU 
-,19  — 
Agent. 


APPENDIX  437 

UVll— Continued 

This  entire  policy  shall  \tc  void  iinlrsfl  the  premium  above  Btated  shall  be  received  by  this  Company  or  by  a  duly  author* 
Jkn4  tprnt  of  this  CVimpiuiy  within  thirty  (M))  iIrvh  of  the  N-^iininK  of  the  term  hereof. 

Damage  rauboii  l»y  rxpltrnion  on^inHtiitf;  within  fit«im  Unlera,  pipefl,  fly  whoein,  engines  and  mnohincry  connert/yl  thrro- 
With  and  opcrnte<l  tlierehy,  is  exi-ImJoti  from  the  rover  of  tfiis  (xiliey,  Hnd  unlesii  oflierwise  proviiiod  hy  agreement  in  writing 
added  li('r<'lo,  this  (.'ompany  Khiill  not  Iw  liahle  for  Iokr  or  dnmnge  oeoiimng  from  any  explosion  originnting  from  nny  malo- 
riajR  or  p^tteepseti  incident  to  llie  tiflsinews  fif  ttie  nsMiircd.  or  of  ttie  tetmnt*  ikeeiipying  the  huilc'ings  or  preinisea  des^'rihed  herein. 
Noeh^im  t<i  ftttneti  heri'to  for  dehiy,  (Ict^'riorntion,  Iok.s  of  market  or  nny  coiiM>(|ueiitiHl  losi*,  or  for  CiHifisojilioii  or  author- 
ized desTruclion  liy  duly  eoiiNti(ut<*<I  govemnientid  or  eivil  aiittionticH  of  tlie  eumitry  in  which  the  property  i.s  t^itimle.  nor  for 
loefi  and  or  <iiimage  to  ghiss  which  may  W.  a  part  <»f  any  t'uihhng  insureij  hereunder,  to  an  uiiiount  in  exee.'^s  of  U:n  (10)  per 
cent,  of  the  vnliie  of  (>iieh  liijilding,  t>ut  in  no  event  .sliall  tlii8  Company  t>c  liable  for  a  grmt^T  profxirtion  of  such  lofw  or  dam- 
age than  the  iimoiint  which  tlii.s  policy  Ixiirs  to  the  tot-'d  nniouiit  of  ail  ftiinilar  insurants  whether  or  not  such  other  in.-^unu>ce 
ahall  inctuile  Iiriliility  for  loss  or  tiainnge  to  g1a.sa. 

This  C'om|>any  ahnll  not  l>o  linlile  lieyoud  the  aetiinl  ea-ih  value  of  the  property  at  the  time  any  low  or  dam.'ige  oceuru, 
and  the  lo.ss  or  «lainage  shall  he  ai^eertjiined  or  ef^timateil  aeerirding  t.**  Riich  actual  cash  value,  with  proper  diiluction  for  de- 
preciation however  caiiKed,  and  shall  in  no  cx'cnt  exce<*d  wh.nt  it  would  then  e^ist  the  insuriHl  to  rejinir  or  rcpliwe  the  same  with 
material  of  like  kind  and  quality;  said  ascertainment  or  estimate  shall  In-  mmie  hy  the  insured  and  this  Company,  or,  if  they 
differ,  then  by  npprais^TS,  as  hereinafter  provided;  and,  the  amount  of  h>s.s  or  damage  having  Iteen  thus  (h'leriiiine*!,  the  Aura 
f<»r  which  this  Company  is  luible  pur>*iinnt  to  this  jwlicy  shall  he  payable  sixty  days  after  <lue  notice,  aKceruiiomciit,  Oftimate. 
and  satisfactory  proof  of  the  lose  have  l)een  received  by  this  Comjiany  in  acconlnnee  with  the  teim.s  of  this  iH>licy  It  shall 
lie  optional,  however,  with  this  Company  to  take  all,  or  any  part  of  the  articlca  at  Kiich  a.sccrtaiiuvl  or  appraise<i  value,  and 
also  to  repair,  rebuild,  or  replace  the  property  lost  or  drimiiged  with  other  of  like  kind  and  ((iiality  within  a  re.i.sonable 
time  on  giving  notice,  within  thirty  days  after  the  receii»t  of  the  proof  herein  rc<|uifed,  of  its  intention  so  to  do;  but  th^re  caa 
lie  no  alwindonment  to  this  Company  of  the  property  descnlxHl. 

This  entire  policy  shall  l>c  void  if  the  insured  has  concealed  or  misrepresented,  in  writing  or  olhorwi.ie,  any  material 
fact  or  circumstance  concerning  this  insurance  or  the  suliject  thereof;  or  if  the  interest  of  the  iiisurfvl  in  the  property  lie  not 
truly  .stated  herein;  or  in  case  of  any  fraud  or  false  swearing  by  the  insured  touching  any  matter  relating  to  this  insurance  or 
the  subject  thereof,  whether  l»efore  or  after  a  loss 

This  Company  shall  not  be  liable  for  loss  to  accounts,  bills,  currency,  deeds,  evidences  of  debt,  money,  notes  or  securi- 
ties; nor  by  theft;  nor  unless  liability  be  specifically  assumed  hereon  for  loss  by  interruption  of  business,  manufacturing  pro- 
cess's, or  otherwise. 

This  Comjiany  shall  not  lie  liable  for  loss  or  damage  covered  under  any  fire  or  other  kind  of  insurance  contract;  nor  for 
Ions  or  damage  caused  by  mihtary  or  naval  forces  of  foreign  enemies,  any  conditions  of  this  policy  to  the  contrary  not- 
withstanding. 

This  policy  shall  not  fie  subject  to  cancellation  by  the  insured  or  by  this  Company  for  a  period  of  ninety  days  l,eginning 
with  the  date  of  this  policy,  but  thereafter  this  policy  shall  be  cancelled  at  any  time  at  the  request  of  the  irisure<l,  in  wliich 
case  the  Company  shaJl  upon  demand  and  surrender  of  this  policy,  refund  the  cxce,ss  «f  paid  pn-miiim  alxivc  the  cust<imary 
short  rates  for  the  expired  time,  meaning  the  customary  short  rate  of  fire  insurance  practice  or  this  policy  may  be  cAncelleil 
by  the  Company  by  giving  to  the  insured  a  five  days'  written  notice  of  cancellation  with  or  without  tender  of  the  excess  of  paid 
premium  above  the  pro  rata  premium  for  the  expired  time,  which  excess  if  not  tendered,  shall  l)e  refundc<l  on  demand  and 
surrender  of  this  policy.  Notice  of  cancellation  shall  state  that  said  excess  premium  (if  iwt  tendered)  will  be  refunded  on 
demand. 

If  loss  occur  the  insured  shall  give  immediate  notice  in  writing  to  this  Company,  protect  the  property  from  further 
damage,  forthwith  separate  the  damaged  and  undamaged  personal  property,  put  it  in  the  liest  possible  order,  make  a  complete 
inventory  of  the  same,  stating  the  quantity  and  cost  of  each  article  and  the  amount  claimed  then'<in;  and  within  sLxty  days 
after  the  loss,  unless  such  time  is  extended  in  writing  by  this  Company,  shall  render  a  statement  to  thi.s  Company,  signed  and 
sworn  to  by  said  insured,  stating  the  knowledge  and  belief  of  the  insured  as  to  time  and  prigin  of  the  lo.s.^,  the  interest  of 
the  insured  and  of  all  others  in  the  property;  the  cash  value  of  each  item  thereof  and  the  amount  of  loss  thereon;  all  incmn- 
brances  thereon;  all  other  insurance,  whether  vaUd  or  not,  covering  any  of  said  property;  and  a  copy  of  all  the  descriptions 
and  schedi'les  in  all  policies;  any  changes  in  the  title,  use,  occupation,  location,  possession,  or  ex^xisure  of  said  property  since 
the  issuing  of  this  policy;  by  whom  and  for  what  purpose  any  building  or  other  property  herein,  di-scribed  and  the  several 
parts  thereof  were  occupied  at  the  time  of  loss;  and  shall  furnish,  if  required,  verified  plans  and  specifications  of  any  build- 
ing,  fixtures,   or  machinery  or  other  property  destroj'ed  or  damaged. 

The  insured,  as  often  as  required,  shaU  exhibit  to  any  person  designated  by  this  Company  all  that  renviins  of  any  prop- 
erty In  rem  described,  and  submit  to  examinations  under  oath  by  any  person  named  by  this  Company,  and  subscribe  the  same- 
and  as  often  as  required,  shall  produce  for  examination  all  books  of  account,  bills,'  invoices,  and  other  vouchers,  or  certified 
copies  thereof  if  originals  be  lost,  at  such  reasonable  place  as  may  be  designated  by  this  Company  or  its  representative,  and 
shall  permit  extracts  and  copies  thereof  to  be  made.  ,   ^ 

In  case  the  insured  and  this  Company  shall  fail  to  agj'ee  as  to  the  amount  of  Toss  or  damage,  each  shall,  on  the  written 
demand  of  either,  before  recovery  can  be  had  hereunder,  select  a  competent  and  disinterested  appraiser.  The  appraisers  shall 
first  select  a  competent  and  disinterested  umpire;  and  failing  for  fifteen  days  to  agree  upon  such  umpire  then,  on  request  of 
the  insured  or  this  Company,  such  umpire  snail  be  selected  by  a  judge  of  a  court  of  record  in  the  stale  in  winch  the  property 
insured  is  located.  The  appraisers  shall  then  appraise  the  loss  or  damage  stating  separately  sound  value  and  loss  or  dam- 
age to  each  item;  and  failing  to  agree,  shall  submit  their  differences  only,  to  the  umpire.  An  award  in  writing,  so  itemized, 
of  any  two  when  filed  with  this  Company  sliali  determhie  the  amount  of  sound  value  and  loss  or  dainagc.  Each  appraiser 
shall  be  paid  by  the  party  selecting  him  and  the  expenses  of  appraisal  and  umpire  shall  be  paid  by  the  p,arties  equally. 

This  Company  shall  not  be  held  to  have  waived  any  provision  or  condition  of  this  policy  or  nny  forfeiture  thereof  by 
any  requirement,  act,  or  proceeding  oo  its  part  relating  to  the  appraisal  or  to  any  examination  herein  provided  for;  and  the 
loss  shall  not  become  payable  untJ  sixty  days  after  the  notice,  ascertjiinnient,  estimate,  and  satisfactory  proof  of  the  loss 
herein  retjuired  have  been  received  by  this  Company,  including  an  award  by  appraisers  when  appraisal  has  been  required. 

This  Company  shall  not  be  liable  under  this  poUcy  for  a  greater  proportion  of  any  loss  on  the  described  property,  than 
the  amount  hereby  insured  shall  bear  to  the  whole  insurance,  whether  valid  or  not,  or  by'  solvent  or  insolvent  insurers,  cover- 
ing such  property. 

This  Company  may  require  from  the  assured  an  assignment  of  all  right  of  recovery  against  any  party  for  loss  or  dam- 
age to  the  extent  that  payment  therefor  is  made  by  this  Company. 

No  suit  or  action  on  this  poUcy,  for  the  recovery  of  any  claim,  shall  be  sustainable  in  any  court  of  law  or  equity  unless 
all  the  requirements  of  this  policy  shall  have  been  complied  with,  nor  unless  commenced  within  twelve  months  next  after  the 
loss;  provided  that  where  such  limitation  is  prohibited  by  the  lav^  of  the  Slate  wherein  this  policy  is  issued,  then  and  in  that 
event  no  suit  or  action  under  this  policy  shall  be  sustainable  unless  commenced  within  the  shortest  Umitation  pcrmitu.^  under 
the  laws  of  such  State. 

This  policy  is  made  and  accepted  subject  to  the  foregoing  stipulations  and  conditions,  together  with  such  other  pro- 
visions, agreements  or  conditions  as  may  be  endorsed  hereon  or  added  hereto,  and  no  officer,  agent  or  other  representative  of  this 
Company  shall  havo  power  to  waive  or  be  deemed  or  held  to  have  v/oived  such  provisions  or  conditions  unless  such  waiver,  if 
any,  shall  be  written  upon  or  attached  hereto,  nor  shall  any  privilt^  or  penuissioa  sffettiog  tbe  iosur&noe  under  this  policy 
esat  or  be  claiin^d  \>y  tbe  insttred  uaiese  so  writtea  or  aUwbed. 


438    INSURANCE  PRINCIPLES  AND  PRACTICES 

LVIII 
APPLICATION  FOR  MEMBERSHIP  IN  A  RECIPROCAL 


Inbemnit)^  Excbange 


The  undersigned,  hereinafter  called  subscriber,  being  the  owner  of  the  Automobile  hereinafter  described 
and  not  used  for  coiruncrcial  purposes,  hereby  applies  for  indemnity  through  the  '  Indemnity 

Exchange  for  one  year  from  the  date  of  the  policy  issued  hereunder,  upon  the  said  automobile  and  the  body, 
machinery  and  equipment  thereof,  while  attached  thereto,  and  warrants  the  following  statements  to  be  true  • 


Name  of  Subscriber, 

Residence,  No 

Business  Address 


street 
Street 


City  or  Town 


CitT  or  Town 


CouDtr 
CouotT 


Business,  « Purchased  New  ?  ... 

(Give  Name  of  Firm  and  Position  in  Same) 

Location  of  Garage, - Number  of  Chauffeurs 

Public  or  Private  f 


Car  Owned  Solely  by  Subscriber? - 

Cost  to  Owner  of  Automobile  Described  Herein,  $ 

8.    Accident  Record  to  Dale, ., „.. 

9, 


Purchased, i9,.„ 


Trade  Name  ol 

Automobile 

No.  of 
Engine 

NV>-of 
Car 

^'ffr°' 

No.  ol 
Cylinders 

Hor3e 
Power 

Model 
Letter 

Yeat-i 
Model 

Motive 
Power 

Character  of    Insurance  applied    for  :   (indicate  iuuraiUf  desired  by  crouios  out  "Yea"  or  "No,") 

Fire  and  Theft Yes — No     Amount  $ -.- Premium  $ 

Collision Ye.- — No  Premium  $ 

Property  Damage.. ..Yes — No  Premium  $  ..„ 

Personal  Liability.. ..Yes — No  Premium  f. 

Total  Premium  $ 

!3nll  ^or  anti  in  ConSt^tratiOtl  of  tllt    t>enefit3  to  be  derived  therefrom  and  the  covenants  herein  contained,  the 

undersigned  Subscriber  hereby  covenants  and  agrees  with  the  other  Subscribers  applying  for  metnt>er5hip  in  the 

iNSEilNtTY  Exchange  and  their,  and  each  of  their,  Attorney-in-Fact,  the  Company,  a  corporation 

tuidcr  the  laws  of  the  State  of  Pennsylvania,  as  follows: 

First:  The  Subscriber  agrees  to  pay  the  premium  as  herein  provided  and  to  exchan'ge'with  other  Sul>scribers  reciprocal 
or  inter-insurance  contracts  providing  automobile  indemnity  among  themselves  for  any  loss  insured  against,  as  provided  by 
Acts  of  Assembly,  and  set  forth  in  said  contracts  of  insurance. 

Second:  The  Subscriber  hereby  designates,  constitutes  and  appoints  the  said  Company,  herein- 

after called  "Attorney,"  to  be  Attorney-in-Fact  for  Subscriber  and  in  Subscriber's  name,  place  and  stead,  to  do  all  things 
which  he/she/they.  Subscriber  or  Subscribers,  might  or  could  do  with  reference  to  this  contract,  or  any  renewal  or  transfer 
thereof,  and  especially  to  exchange  contracts  of  indemnity  with  Subscribers  of  the  Indemnity  Exchan(;e ;  and 

in  the  Subscriber's  name  to  make,  issue,  modify  or  cancel  contracts  therefor  containing  such  terms,  warranties  and  agree- 
ments as  Attorney-in-Fact  shall  deem  best ;  to  procure  reinsurance ;  to  collect,  receive  and  receipt  for  all  money  due  from  or  to 
becredited  to  the  Subscriber's  account  by  reason  of  this  contract,  to  give,  waive  or  receive  all  notices  or  proofs. of  loss;  to  adjust 
and  settle  all  losses  and  claims  under  Subscriber's  Indemnity  Contracts ;  to  appear  for.  compromise,  prosecute,  defend  or  adjust 
any  claims,  suits  or  proceedings  on  Subscriber's  Indemnity  Contracts,  to  do  any  act  with  reference  to 'Subscriber's  liability  under 
Inter-insurance  Indemnity  Contracts,  which  Subscriber'  could  do,  with  power  of  su!)Stitution.  The  power  of  attorney  hereby 
given  is  strictly  h'mited  to  the  uses  and  purposes  herein  expressed  and  to  the  provisions,  agreements  and  conditions  con- 
tained in  the  Contract  of  Indemnity  issued  hereunder  and  any  renewals  or  transfers  thereof.  The  Subscriber  and 
Subscribers  further  agree  to  execute  and  deliver  to  the  Attorney-in-Fact  all  papers  necessary  to  carry  out  the  purpose  and 
provisions  hereof. 

Third:  Subscriber  agrees  that  Twenty-five  per  centum  (25%)  of  the  premium  provided  for  in  the.  Indemnity  Contract 
or  renewal  contracts  given  hereunder  shall  be  retained  by  and  paid  to  the  Company  as  compensa- 

tion for  and  in  consideration  of  its  becoming  Attorney-in-Fact  for  Subscriber  as  aforesaid.  The  remaining  Seventy-five  per 
centum  (757o)  shall  be  applied  to  the  payment  of  losses  or  repaid  to  Subscriber  as  provided  in  said  contracts. 

This  agreement  can  be  signed  upon  any  number  of  counterparts  with  the  same  effect  as  if  the  signatures  of  all  Subscribers 
were  upon  one  and  the  same  instrument,  and  wherever  the  word  Subscriber  is  used  the  same  shall  mean  Subscriber  or 
Subscribers  to  this  or  any  duplicate  agreement,  and  shall  be  and  is  binding  upon  the  parties  hereto,  their  Executors, 
Administrators,  Successors  and  Assigns  severally  and  ratably  as  provided  in  said  Contract  of  Indemnity. 

3n  Wiitntii  3BI)treof,     the  Subscriber  hereunto  sets  his  hand  and  seal,  this - _.day  of 

— „ _  A.  D,  I9X 


^Accepted,  Philadelphia, 


•191 


Indeunity  Company, 
Attorney-in-Fact. 


..-^1^ 


By.. 


r:o.„ 


No. 


APPENDIX 

LIX 
POLICY  OF  RECIPROCAL 


439 


IFnbemnit^  lEjccban^e 


COMBINATION  AUTOMOBILE  INDEMNITY  CONTRACT 


Section  I. 
Insurers. 


Considera* 
tion. 


Section  11. 
Agreement. 


Section  IIL 

Fire. 

Theft. 
Collision. 


THE  SUBSCRIBERS  to  the  EXCHANGE,   severaUy, 

but  not  jointly,  each  ratably  with  other  subscribers,  but  not  one  for  the  other,  and  represented  by  the 
Company,  Attorney-in-Fact, 

IN  CONSIDERATION-  (1)  of  the  payment  in  advance  of  the  premium  deposit  herein  provided, 
(2)  the  statements  made  in  the  application  for  this  Indemnity  Contract,  a  copy  of  which  is  attached 
hereto  and  made  a  part  hereof,  and  (3)  the  execution  of  a  power  of  attorney  to  the 

Company,  authorizing  it  to  execute  recipro<!fil   or  inter-insurance  contracts  between  the 
holder  of  this  Indemni^  Contract  and  other  subscribers  to  said  Exchange, 

AGREE  TO  INDEMNIFY 


Section  IV. 

^operty 

Q^Oiage. 


Section  V. 

Personal 

liability. 


the  Insured,  subject  to  the  provisions  and  conditions  set  forth,  herein, 

AGAINST  actual  loss  or  damage  to  the  automobile  described  in  the  application  for  this  Indemnity 
Contract,  including  its  operating  equipment  while  attached  thereto,  to  an  amount  not  exceeding  the 
amount  specified  in  this  Indemnity  Contract,  if  caused  within  the  period  covered  by  this  Indemnity 
Contract : 

1.  BY  FIRE  arising  from  any  cause  whatsoever,  including  self-ignition,  or  actual  loss 
or  damage  caused  by  lightning  or  by  the  burning,  derailment,  collision,  stranding  or  sinking  of 
the  conveyance  of  any  common  carrier  in  or  upon  which  the  said  automobile  is  being  transported, 
including  general  average  and  salvage  charges  for  which  the  Insured  is  legally  liable ; 

2.  BY  ROBBERY,  Theft  or  Pilferage  in  excess  of  $25.00  on  any  single  occasion,  by  per- 
sons other  than  those  in  the  employment,  Service  or  household  of  the  Insured; 

3.  BY  COLLISION  with  any  other  object,  moving  or  stationary,  excluding  loss  or  dam- 
age caused  by  striking  any  portion  of  the  roadbed  or  by  striking  the  rails  or  ties  of  any  street, 
steam  or  electric  railroad.  Loss  or  damage  to  tices  shall  not  be  covered  unless  the  total  loss  or 
damage  resulting  from  one  collision  shall  exceed  $200.00. 

Provided  that  the  automobile  insured  hereby  is  valued  at  the  sum  insured  and  that  the  liability 
assumed  for  loss  by  fire  or  theft  shall  not  exceed  the  amount  specified  in  the  application  for  this 
Indemnity  Contract,  and  that  liability  for  loss  by  collision  shall  not  exceed  the  limit  stated  in  Condi- 
tion "B." 

Provided  also  that  each  claim  shall  be  adjusted  separately,  and  that  from  the  amount  of  each 
loss  claimed  because  of  theft  and/or  collision,  when  determined,  the  sum  of  $25.00  shall  be  deducted, 
and  payment  made  in  excess  of  that  amount  only. 

AGAINST  loss  and/or  expense  arising  or  resulting  from  claims  upon  the  Insured  for  damages 
on  account  of  damage  to,  or  destruction  of,  property  of  every  description  (except  property  of  the  In- 
sured or  in  charge  of  the  Insured  or  any  of  his/her  employees  or  carried  in  or  upon  the  automo- 
bile covered  hereby)  caused  by  an  accident  due  to  the  ownership,  maintenance  and/or  use  of  the 
automobile  described  in  the  application  for  this  Indemnity  Contract,  and  occurring  within  the  period 
covered  hereby. 

Provided  that  no  liability  under  this  clause  is  assumed  in  excess  of  $1,000.00  gross  loss  or 
damage. 

AGAINST  loss  and/or  expense  arising  or  resulting  from  claims  upon  the  Insured  for  Damages  on 
account  of  bodily  injuries  and/or  death  accidentally  suffered,  or  alleged  to  have  been  suffered,  by 
any  person  or  persons,  other  than  employees  of  the  Insured,  by  reason  of  the  ownership,  mainte- 
nance and/or  use  of  the  automobile  described  in  the  application  for  this  Indemnity  Contract  and  oc- 
curring within  the  period  covered  by  said  Indemnity  Contract. 

Provided  that  liability  for  loss  on  account  of  an  accident  resulting  in  bodily  injuries  and/or 
death  to  one  person  is  limited  to  $5,000.00;  and  subject  to  the  same  limit  for  each  person,  the  to- 
tal liability  for  loss  on  account  of  any  one  accident  resulting  in  bodily  injuries  and/or  death  to  more 
than  one  person  is  limited  to  $10,000.00.  A 

Provided  also  that  no  liability  is  assumed  under  this  Indemnity  Contract  for  any  claims  arising 
by  reason  of  any  obligation  assumed  by  or  imposed  upon  the  Insured  under  any  Statute  to  pay  Com- 
pensation or  damage  irrespective  of  negligence  on  the  part  of  the  Insured,  as  employer  or  otherwise, 
unless  this  Indemnity  Contract  is  extended  by  endorsement  .covering  such  obligation. 


440    INSURANCE  PRINCIPLES  AND  PRACTICES 

LIX — Continued 
THIS  INSURANCE  IS  SUBJECT  TO  THE  FOUOWING  CONDITIONS! 


Insored'i 

Liability. 


Lois 

ActsaL 


Haxard 


Unusual 
Circuin- 
ttances. 


This  Coo- 
tract  Pet- 
so  naL 

Misrepre- 
sentation 
or  Assigo- 
ment. 


Territorial 
Limits. 


Concnrrem 
losurance. 


Accidents. 
Losses  and 
Claims  oc- 
curring 
mast  be 
reported. 


Adjostinent 
of  Loss. 


A.  The  liability  of  the.  Insured  as  a  subscriber  to  the  Indemnity  Exchange 
under  each  contract  of  indemnity,  made  through  Attorney-in-Fact,  shall  be  the  same  as  if  a  separate 
contract  were  issued  therefor,  and  shall  be  for  a  sum  which  is  the  same  proportion  of  the  aggre- 
gate liability  thereunder,  as  the  Subscriber's  pretnium  deposit  bears  to  the  net  aggregate  premium 
deposits  of  the  Exchange  under  all  contracts  in  force  at  the  time  such  liability  arises;  provided  that 
the  aggregate  liability  of  each  subscriber  created  by  this  contract  shall  not  exceed  five  times  the  ampunt 
of  the  premium  deposit  herein  provided  to  be  paid.  In  consideration  of  this  limitation  of  liability,  the 
Subscriber  agrees  to  at  all  times  maintain  the  insurance  reserve,  required  by  law  to  be  maintained  out 
of  the  premium  deposit  herein  provided  for,  and  whenever  losses,  whether  liquidated  or  contingent, 
chargeable  against  the  Subscriber's  account,  shall  in  the  judgment  of  Attorney-in-Fact  require  an  ad- 
ditional contribution,  in  order  to  prevent  encroachment  upon  that  portion  of  Subscriber's  premium 
deposit  set  aside  for  insurance  reserve.  Subscriber  shall,  upon  notice  and  demand  from  the  Attorney-in- 
Fact,  forthwith  pay  the- Attorney-in-Fact  such  additional  sum  or  sums  as  may  be  specified,  not  exceed- 
ing in  the  aggregate  the  total  liability  of  the  Subscriber  as  hereinabove  limited.  Such  additional 
payments  shall  be  credited  to  the  Subscriber's  account,  and  applied  or  returned  to  the  Subscriber  in  the 
same  manner  as  the  original  net  premium  deposit. 

B.  Liability  for  damages  resulting  from  collision,  or/and  from  property  damage  is  limited  to 
the  actual  intrinsic  value  of  the  property  damaged  or'  destroyed,  at  the  time  of  its  damage  or  its 
destruction;   or  the  cost  of  its  repair  or  replacement: 

C.  No  liability  is  assumed  on  account  of  accidents  occurrittg  while  the  insured  automobile  is 
being  operated : 

1. — In  any  race  or  speed  contest, 

2. — Or  for  any  unusual  or  extra  hazardous  purpose, 

3. — Or  by  any  person  in  violation  of  law  as  to  age,  or  without  a  proper  license, 

4. — Or  .in  any  event  by  a  person  under  the  age  of  16  years, 

5. — Or  for  rental,  hire  or  livery  or  the  transportation  of  passengers  for  hire. 

6. — Or  used  for' the  carrying  of  explosives  not  used  in  connection  with  its  operation. 

This  contract  shall  forthwith  cease  and  determine  if  said  automobile  is  used  for  any  of  the  above 
purposes^ 

No  liability  is  assumed  for  losses  caused  by  invasion,  msurredtion,  riot,  civil  war,  military  or 
usurped  power,  or  by  order  of  any  civil  authority;  or  by  neglect  of  the  Insured  to  use  all  reason- 
able means  to  save  or  preserve  the  property  insured  from  loss. 

D.  The  right  to  indemnity  hereunder  is  personal  to  the  Insured,  and  no  liability  is  assumed 
for  any  liability  of  others,  assumed  by  the  Insured,  under  any  contract  or  agreement,  oral  or  written. 

E.  The  Insured  warrants  fhe  statements  upon  the  attached  copy  of  his  application  to  be  true, 
and  this  contract  shall  be  void  if  the  Insured  or  his  agent  conceals  or  misrepresents,  in  writing  or 
otherwise,  any  fact  or  circumstance  in  connection  herewith,  or  makes  any  attempt  to  defraud  the 
Exchange  before  or  after  loss  or  if  the  interest  of  the  Insured  in  the  property  be  other  than  uncon- 
ditional and  sole  ownership,  or  if  the  property  insured  be  or  become  encumbered  by  any  lien  or 
mortgage,  or  if  any  change  other  than  by  death  of  the  Insured  takes  place  in  the  interest,  title  or 
possession  of  the  Insured  by  voluntary  act  or  otherwise;  provided  that  in  the  case  of  the  death  of 
the  Insured  this  contract  shall  continue  in  force  for  the  benefit  of  the  legal  representatives  of  the  In- 
sured until  noon,  Standard  time,  on  the  15th  day  of  the  following  calendar  month,  unless  the  original 
period  of  the  Indemnity  Contract  terminates  or  said  Indemnity  Contract  be  cancelled  prior  thereto 

F.  This  Indemnity  Contract  does  not  cover  any  loss  or  expense  arising  or  resulting  from  ac- 
cident occurring  while  the  automobile  insured  hereunder  is  being  maintained  or  used  beyond  the  limits 
of  the  United  States  of  America  (excIusive~of  Alaska,  the  Hawaiian  Islands  and  Porto  Rico)  and 
Canada. 

G.  If  the  Insured  carry  a  Policy  of  another  insurer  against  any  loss  and/or  expense  covered  by 
this  Indemnity  Contract  the  Insured  shall  not  recover  from  subscribers  to  Indemnity  Ex- 
change, a  larger  proportion  of  the  entire  loss  and/or  expense  than  the  amount  hereby  insured  bears  to 
the  total  amount  of  valid  and  collectible  insurance  applicable  thereto. 

H.  The  Insured  upon  the  occurrence  of  fire,  theft  or  accident  giving  rise  to  any  claim  here- 
under shall  send  immediate  written  notice  thereof  with  the  fullest  information  obtainable  at  the 
time,    to   the    office    of    the  Company,   Attorney-in-Fact,   at 

Pennsylvania,  and  if  a  claim  is  to  be  made  under  this  Indemnity  Contract,  by  reason  of  damage 
and/or  loss  or  for  personal  liability  arising  from  such  fire,  theft  or  accident,  a  detailed  statement  shall 
be  ferthwith  made  and  returned  upon  bhnks  supplied  by  the  Indemnity  Company,  At- 

torney-in-Fact. Such  statement  shall  show  proper  inventory  of  the  parts  or  equipment  destroyed  or 
damaged  and  state  to  the  best  of  knowledge  and  belief  the  cost  of  replacement  or  repair  of  the  same. 
The  Insured  shall  at  all  times  rentier  to  the  Exchange  and  its  Attorney-in-Fact  all  cooperation  and 
assistance  in  his  power,  and  the  failure  to  furnish  to  the  Company,  Attorney- 

in-Fact,  such  information,  receipts,  vouchers  and  sworn  statements  when  and  as  the  same  may  be 
required  in  connection  with  any  claim  under  this  Indemnity  Contract,  shall  void  such  claim  and  ter- 
minate  this  Indemnity  Contract. 

I.  In  the  event  of  any  loss  or  damage  covered  by  this  Indemnity  Contract  to  the  insured  auto- 
mobile or  its  operating  equipment,  the  loss  shall  be  determined  by  the  Insured  and  the  Attorney-in- 
Fact,  if  possible,  otherwise  by  two  appraisers,  one  to  be  chosen  by  the  Insured  and  one  by  the  Attor- 
ney-in-Fact _  The  two  appraisers  so  chosen,  if  they  are  not  able  to  agree,  shall  select  a  third  and  the 
award  in  writing  of  any  two  shall  determine : 

1. — The  nature  and  extent  of  such  damage; 

2. — The  lime  required  to  effect  repair  or  replacement; 

3. — The  amount  of  the  loss. 


APPENDIX 


441 


Rtpairor 
Replaoe- 
mciit. 


Inspection. 
Cost  oi 
Salvage. 


Insurance 

during 

repairs. 


LIX — Continued 

The  Insured  shall  pay  the  appraiser  selected  by  him  and  the  Indemnity  Exchange  shall 

pay  the  appraiser  selected  by  its  Attorney-in-Fact,  and  the  Insured  and  the  Exchange  shall  bear  equally 
all  other  expenses  of  the  appraisal. 

J.    The  Indemnity  Exchange  shall  have  the  right  at  the  option  of  Attorney-in- 

Fact,  and  by  such  means  as  Attorney-in-Fact  elects,  to  repair,  rebuild  or  replace  the  property  dam- 
aged, destroyed  or  lost  with  other  of  like  kind  and  quality  within  reasonable  time,  or  to  pay  the  amount 
determined  as  above  in  money,  and  retain  all  salvage. 

Reasonable  time  Shall  be  alloured  to  the  Attorney-in-Fact  for  inspection,  before  repairs  are  un- 
dertaken or  physical  evidence  of  damage  removed,  but  any  act  by  whomsoever  done  for  the  mani- 
fest protection  or  salvage  of  the  automobile  or  property  damaged  shall  be  without  prejudice  and 
considered  as  done  for  the  benefit  of  all  concerned  and  all  reasonable  expenses  so  incurred  shall  be 
a  claim  under  this  Indemnity  Contract. 

K.  In  the  event  of  loss  or  damage  to  the  automobile,  whether  such  loss  or  damage  is  covered 
by  this  Indemnity  Contract  or  not,  liafcility  hereunder  shall  be  proportionately  reduced  until  repairs 
have  been  completed  and  shall  then  attach  for  the  full  amount  originally  written  without  additional  cost 
to  the  Insured. 


Suits 

against  tiw 
Insured. 


Assistance 
by  the 
Insured. 


Subroga- 
tion. 


Payment  0* 
Claims. 


Right  of 
Recovery. 
Time 
Limit. 


Avoiding 
Mu.iiplicity 
vi  Suits. 


Acceptance 
of  process. 


No  Assign- 
ment. 


No  Altera- 
tion or 
waiver  ol 
conditioit. 


Temtaa- 
tioo. 


Cancelhi- 
tion. 


L.  If  suit  be  brought  against  the  Insured  to  enforce  a  claim  for  damages  covered  by  this  In- 
demnity Contract,  the  Insured  shall  immediately  forward  to  the  Exchange  or  its  Attorney-in-Fact 
every  summons  or  other  process  as  soon  as  the  same  shall  have  been  served  on  the  Insured.  The  Ex- 
change through  its  Attorney-in-Fact  shall,  in  the  name  and  on  behalf  of  the  Insured,  defend  such 
suits.    The  expense  of  such  defense  shall  be  treated  as  a  loss  under  this  Indemnity  Contract. 

The  Insured,  whenever  requested  by  the  Exchange  or  its  Attorney-in-Fact,  shall  aid  in  effect- 
ing settlements,  securing  information  and  evidence,  the  attendance  of  witnesses  and  in  prosecuting 
appeals,  but  the  Insured  shall  not  voluntarily  assume  any  liability  or  interfere  in  any  negotiation 
for  settlement,  or  in  any  legal  proceedings,  or  incur  any  expense,  or  settle  any  claim,  except  at  his/her 
or  its  own  cost,  without  the  written  consent  of  the  Company,  Attorney-in- 

Fact,  previously  given,  except  that,  as  respects  liability  for  personal  injuries  covered  hereunder,  the 
Insured  may  provide,  at  the  expense  of  Subscribers  to  Indemnity  Exchange,  such  im- 

mediate surgical  relief  as  is  imperative  at  the  time  of  the  accident 

M.  In  case  of  payment  of  loss  and/or  expense  under  this  Indemnity  Contract,  the  Subscribers 
to  Indemnity  Exchange  shall  be  subrogated,  to  the  amount  of  such  payment,  to  the 

Insured's  rights  of  recovery  against  others  for  such  loss  and/or  expense,  and  the  Insured  shall  ex- 
ecute all  papers  required  and  shall  cooperate  with  Attorney-in-Fact,  to  secure  such  rights. 

N.    Claims  for  loss  or  damage  shall  not  become  payable  until  thirty  days  after  the  notice,  as- 
certainment, estimate  and  satisfactory  proof  of  loss  have  been  received  by  the 
Company,  Attorney-in-Fact,  including  the  award  by  the  appraisers,  when  appraisal  is  required. 

No  actioA  shall  lie  against  any  Subscriber  to  recover  any  loss  or  expense  covered  by  this  In- 
demnity Contract  arising  or  resulting  from  claims  upon  the  Insured  for  damages,  unless  such  action 
shall  be  brought  by  the  Insured  for  loss  and/or  expense  actually  sustained  and  paid  in  money  by  the 
Insured  after  actual  trial  of  the  issue,  or  unless  such  action  is  brought  within  sixty,  days  after  the 
payment  of  such  loss  or  expense;  or  for  any  crther  loss  or  damage  covered  by  this  Indemnity  Con- 
tract unfess  action  is  brought  within  one  year  after  the  occurrence  causing  the  loss  or  damage. 

To  avoid  multiplicity  of  suits,  the  Insured  agrees  that  all  actions  or  suits  at  law  or  in  equity 
by  or  on  his/her  behalf  by  reasol»  of  any  claim  hereunder,  shall  be  against  the 

Company,   Attorney-in-Fact   for  the   Subscribers  to  the  Indemnity  Exchange; 

and  that  not  more  than  one  suit  shall  be  maintained  at  one  time.  Each  of  the  Subscribers  agrees 
that  the  final  decision  in  any  such  suit  shall  be  accepted  as  decisive  of  a  similar  claim,  so  far  as  the 
same  may  subsist,  against  each  of  the  other  Subscribers  liable  therefor,  absolutely  fixing  his  liability 
in  the  premises;  and  in  consideration  of  the  issuance  of  this  contract  of  indemnity,  each  of  the  Sub- 
scribers  agrees  to  abide  by  such  final  decision  in  the  same  manner  and  to  the  same  effect  as  if  he  had 
been  soledefendant  in  a  similar  suit  or  proceeding  as  to  a  similar  claim  against  him,  so  far  as  the 
same  may  subsist,  and  the  Company,  Attorney-in-Fact,  is  hereby  authorized  to 

receive  and  admit  service  of  process  on  behalf  of  any  Subscriber,  in  any  suit,  or  other  proceeding,  be- 
gun or  maintained  as  aforesaid. 

O.  No  assignment  of  interest  under  this  Indemnity  Contract  shall  be  valid,  and  no  officer,  agent 
or   other  '  representative   of  the  Indemnity   Exchange   or   of 

Company,  Attorney-in-Fact,  shall  have  power  to  waive  or  alter  any  provision  or  condition  of  this 
Indemnity  Contract,  except  such  as  by  the  terms  of  this  Indemnity  Contract,  may  be  the  subject 
of  agreement  endorsed  hereon  or  added  hereto:  nor  shall  notice  to  any  agent  nor  knowledge  posr 
sessed  by  any  agent  or  any  other  person  be  held  to  eflFect  a  waiver  or  change  in  any  part  of  this  con- 
tract, and  none  of  the  conditions  and  provisions  hereof  shall  be  held  to  be  waived  unless  such  waiver 
be  written  upon  or  attached  hereto  and  executed  by  the  Company,  Attorney- 

in-Fact  ;    and  the  Insured  agrees  upon  the  acceptance  of  this  Indemnity  Contract  that  its  terms  em- 
body all  agreements  between   himself  and  the  Attorney-in-Fact,  Agents  and  Subscribers  to  tht 
Indemnity  Exchange,  or  any  of  them  relating  to  the  insurance  referred  to  herein. 

P.  This  Indemnity  Contract  may  be  terminated  at  any  time  by  Attorney-in-Fact  for  any  vio- 
lation of  its  conditions,  and  it  may  be  cancelled  by  either  party  hereto  on  the  1st  or  I5th  day  of  any 
calendar  month  by  written  notice  given  five  days  prior  to  said  date.  Upon  surrender  of  this  Indemnity 
Contract  Subscriber  shall  receive  the  amount  standing  to  the  credit  of  his/her  account  on  the  books 
of  the  Indemnity  Exchange  on  date  of  termination,  provided   that   the   Subscriber  ex- 

pressly agrees  that  Attorney-in-Fact  shall  deduct  from  any  amount  otherwise  payable  upon  the  ter- 
mination or  cancellation  of  this  contract,  such  an  amount  as  Attorney-in-Fact  shall  deem  necessary  to 
pay  and  discharge  the  Subscriber's  liability  in  connection  with  any  unliquidated  or  contingent  claim 
or  claims. 


442    INSURANCE  PRINCIPLES  AND  PRACTICES 

LIX — Continued 


Cootxa^ 
Period. 


Pi  en  Hum 


AocctaxOf 
Ing. 


Q.    The  cautract  fxtioi  shall  be 
191 


„______jnonths  beginning  on  the  , — 

at  nocm.  and  ending  on  the  .    .  day  o£ 


..-day  ol 


191 at  noon,  standard  time 

R.    Tbii  premium  deposit  for  this  Indemnity  Contract  shall  be 

^ DoUarx 

payable  at  the  Home  Office  of  the  Indemnity  Exchange.    Twenty-five  per  cent,  of  said 

premium  deposit  shall  be  retained  by  Company  in  consideration  of  its  agreeing 

to  act  as  Attorney-in-Fact  for  the  purposes  hereof.    The   remaining   seventy-five   per'  cent,   shall   be 
placed  to  the  credit  of  the  Subscriber  upon  the  books  of  the  Indemnity  Elxchange,  and 

deposited  or  invested  as  the  Trustees  shall  designate. 

The  fund  so  created  shall  be  applicable  to  the  payment  of  adjustments  and  losses  as  provided 
in  this  Indemnity  Contract  and  a  separate  and  individual  account  shall  be  kept  by  Attorney-in-Fact, 
which  shall  be  open  to  the  inspection  of  the  Subscriber  showing  the  net  amount  of  his/her  premium 
deposit  and  the  amount  of  each  charge  as  made  against  it.  Each  account  shall  be  chargeable  on  the 
1st  and  15th  day  of  each  calendar  month,  with  its  proper  pro  rata  of  loss.  State  and  Federal-taxes  and 
any  amount  properly  chargeable  thereto. 

At  the  termination- or  cancellation  of  this  Indemnity  Contract,  the  balance  appearing  to  Sub- 
scriber's credit,  less  such  uniform  percentage  as  the  Trustees,  chosen  annually  by  the  Attorney-in- 
Fact  from  the  Subscribers,  may  determine  to  be  a  proper  contribution  to  a  General  Contingent  Fund, 
shall  be  applied  on  account  of  further  insurance,,  or  upon  written  request  calling  for  such  payment, 
refunded  to  the  Subscriber. 

Subscriber  agrees  that  any  amount  contributed  out  of  his  premium  deposits  to  said  General  Con- 
tingent Fund  may  be  retained  by  Trustees  and  applied  to  any  purpose  which  Attorney-in-Fact  deems 
proper  and  advantageous  to  subscribers  to  Indemnity  Exchange. 

No  term  or  condition  of  this  Indemnity  Contract  is  intended  to  create,  creates,  or  shall  be  con- 
strued to  create  a  partnership  or  mutual  insurance  association;  or  to  give  rise  to  or  create  any  joint 
or  general  liability. 

This  contract  is  made  and  accepted  subject  to  the  foregoing  terms  and  conditions  and  no  pro- 
visions or  terms  affecting  the  indemnity  -under  this  contract  exist  unless  written  hereon. 

IN  WITNESS  WHEREOF  the  Subscribers  to 
these  presents  to  be-  executed  this  .day  oL 


Indemnity  Exchange  haye  caused 
A.  D..  191 


Sxamised 
<9 


Aiitsi 


Secretary. 


By 


COMPANY,  Attorney-in-Fact. 


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*^-              4-» 

APPENDIX 


443 


LX 

LLOYDS  ASSOCIATION 
UNDERWRITERS  COMPOSING  ASSOCIATION 


Name  and  Address 


Liability 
assumed 


Frederick  Loeser  &  Co.,  Brooklyn,  N.  Y $40,000 


Lamson  &  Hubbard  Co.,  Brooklyn,  N.  Y 

Lord  &  Taylor,  New  York 

Arnold,  Constable  &  Co.,  Fifth  avenue.  New  York 

R.  H.  Macy  &  Co.,  Broadway,  New  York 

Stern  Brothers,  37  West  Forty-second  street.  New  York... 

Abraham  &  Strauss,  422  Fulton  street,  Brooklyn,  N.  Y 

Woodward  &  Lothrop,  Washington,  D.  C 

B.  Altman  &  Co.,  New  York 

R.  H.  White  Co.,  Boston,  Mass 

Strawbridge  &  Clothier,  Philadelphia,  Pa 

The  Pittsburg  Dry  Goods  Co.,  Pittsburgh,  Pa 

Emery-Beers  Co.,  New  York 

The  John  Shillito  Co.,  Cincinnati,  Ohio 

John  Wanamaker,  New  York 

C.  F.  Hovey  &  Co.,  Boston,  Mass 

Best  &  Co.,  New  York 

N.  Snellenburg  &  Co.,  Philadelphia,  Pa 

Wheeler  &  Motter,  Mercantile  Co.,  St.  Joseph,  Mo 

Brooks  Brothers,  New  York 

American  Lithographic  Co.,  New  York 

Carson  Pirie  Scott  &  Co.,  Chicago,  111 

Kaufman  Dept.  Stores,  Pittsburgh,  Pa 

Sibley,  Lindsay  &  Curr  Co.,  Rochester,  N.  Y 

L.  Bamberger  &  Co.,  Newark,  N.  J 

Fownes  Bros  Co.,  New  York 

Cooper,  Coate  &  Casey  Dry  Goods  Co.,  Los  Angeles,  Cal. 

James  McCreery  &  Co.,  New  York 

Campbell,  Metzger  &  Jacobson,  New  York 

Kaufman  &  Baer  Co.,  Pittsburgh,  Pa 

National  Cloak  &  Suit  Co.,  New  York 

Wm.  Taylor,  Son  &  Co.,  Cleveland,  Ohio 

J.  L.  Hudson  Co.,  Detroit,  Mich 

L.  F,  Dommerich  &  Co.,  New  York 

Passavant  &  Co.,  New  York 

L.  Grief  &  Bro.,  Baltimore,  Md 

The  Halle  Bros.  Co.,  Cleveland,  Ohio 

Wm.  Islin  Co.,  New  York 

John  Taylor  Dry  Goods  Co.,  Kansas  City,  Mo 

Hy  Sonneborne  Co.,  Baltimore,  Md 

Schefer,  Schramm  &  Vogel,  New  York 

Gimbel  Bros.,  New  York 

Western  Dry  Goods  Co.,  Seattle,  Wash 

Greeff  &  Co.,  New  York 


$20,000 
each 


444    INSURANCE  PRINCIPLES  AND  PRACTICES 


LX — Continued 


Gimbel  Bros.,  Incorporated,  Milwaukee,  Wis 

Lesher,  Whitman  &  Co.,  670  Broadway,  New  York 

The  May  Department  Stores  Co.,  St.  Louis,  Mo 

The  May  Co.,  Cleveland,  Ohio 

H.  C.  F.  Koch  &  Co.,  132  West  125th  street.  New  York. 

W.  M.  Whitney  &  Co.,  Albany,  N.  Y 

Frank  &  Dugan,  New  York 

Bloomingdale  Bros,  New  York 

Fleitman  Co.,  New  York 

The  H.  and  S.  Pogue  Co.,  Cincinnati,  Ohio 

Boggs  &  Buhl,  Incorporated,  Pittsburgh,  Pa 

Endicott,  Johnson  &  Co.,  New  York 

Stern  &  Stern,  New  York 

W.  H.  McElwain  Co.,  New  York 

J.  H.  &  C.  K.  Eagle,  New  York 

The  Fair,  Monroe  and  State  streets,  Chicago,  111 

The  M.  O'Neil  Co.,  Akron,  Ohio 

Stix,  Baer  &  Fuller  Dry  Goods  Co.,  St.  Louis,  Mo 

J.  Kridel  Sons  Co.,  New  York , 

Longley  &  Michaels  Co.,  San  Francisco,  Cal 

Bullocks,  a  corporation,  Los  Angeles,  Cal 

L.  S.  Donaldson  &  Co.,  Minneapolis,  Minn 

The  Denver  Dry  Goods  Co.,  Denver,  Colo 

S.  Kann  Sons  &  Co.,  Washington,  D.  C 

Jones,  McDuffie  &  Stratton  Co.,  Boston,  Mass 

Browning,  King  &  Co.,  16  Cooper  square.  New  York 

Frederick  Victor  &  Achelis,  New  York 

Weinstock,  Lubin  &  Co.,  Sacramento,  Cal 

Hochchild,  Kohn  &  Co.,  Baltimore,  Md 

Dives,  Pomery  &  Stewart,  Harrisburg,  Pa 

Emery  Bird  Thayer  Dry  Goods  Co.,  Kansas  City,  Mo..  . 

The  Hunter  &  Tuppen  Co.,  Syracuse,  N.  Y 

R.  H.  Stearns  &  Co.,  Boston,  Mass 

Aitken,  Son  &  Co.,  New  York 

McGibbon  &  Co.,  New  York 

Hager  &  Bro.,  Lancaster,  Pa 

Rosenbaum  Co.,  Pittsburgh,  Pa 

J.  K.  Stifel  &  Co.,  New  York 

Hahne  &  Co.,  Newark,  N.  J 

Sharp  &  Dohme,  Inc.,  Baltimore,  Md 

L.  Herzog  &  Bros.  Dry  Goods  Co.,  St.  Louis,  Mo 

Meier  &  Frank  Co.,  Portland,  Ore 

Greenshields,  Ltd.,  Montreal,  Can 

Adams,  Flanigan  Co.,  New  York 

Susquehanna  Silk  Mills,  New  York 

A.  Lisner,  Washington,  D.  C 

Gladding  Dry  Goods  Co.,  Providence,  R.  I 


$10,000 
each 


$5,000 
each 


APPENDIX  445 

LX — Continued 
INCOME 

Gross   premiums    $121,329.95 

Deduct  return  premiums 1,710.88 

Total  net  premiums  written $119,619.07 

Interest; 

Bonds $16,084.95 

Deposits   1,765.48 

Total    17,850.43 


Total  Income   $137,469.50 

Ledger  Assets  December  31  of  previous  year 430,595.62 


Total    $568,065.12 


DISBURSEMENTS 

Losses  less  discounts $349.84 

Expenses  of  adjustment  and  settlement  of  losses 28.00 

Commissions  or  brokerage 17,942.85 

Salaries,  fees  and  other  charges  of  officers,  directors,  attorneys  in 

fact  and  home  ofiice  employees 146.20 

Legal   expenses    500.00 

Fire  department,  patrol  and  salvage  corps  assessments,  fees,  taxes 

and   expenses    738.82 

State  taxes  on  premiums 495.19 

Insurance  department  licenses  and  fees 139.00 

All  other  licenses,  fees  and  taxes 980.97 

Miscellaneous  102.13 

Dividends  to  subscribers 41,220.10 

Gross  decrease  by  adjustment,  in  book  value  of  ledger  assets,  viz.: 

Bonds    9,390.00 


Total   Disbursements   $72,033.10 

Balance   $496,032.02 


LEDGER  ASSETS 


Book  value  of  bonds $401,720.00 

Deposits  in  trust  companies  and  banks  on  interest 93,805.17 

Agents'  balances  representing  business  written  subsequent  to  Octo- 
ber 1,   1918 506.85 


Total    $496,032.02 


NON-LEDGER   ASSETS 


Interest  accrued  on  bonds 4,514.34 

Market  value  of  bonds  over  book  value 2,500.00 


Total  Assets  $503,046.36 


446    INSURANCE  PRINCIPLES  AND  PRACTICES 


LX — Continued 


LIABILITIES 


Unearned  premiums  $59,016.30 

Contingent  commissions  or  other  charges  due  or  accrued 905.59 


Liabilities    $59,921.89 

Surplus    443,124.47 


Total    $503,046.36 

RISKS  AKO  PREMIUMS 

Fire  Risks  Premiums 

In  force  December  31,  1917 $26,892,000  $91,360.08 

Written  or  renewed  in  1918 31,234,000  121,329.95 

Totals     $58,126,000  $212,690.03 

Deduct  expirations  and  cancellations 24,494,700  94,657.44 

In  force  December  31,  1918 $33,631,300  $118,032.59 

RECAPITULATION   OF  FIRE   RISKS   AND  PREMIUMS 


Gross 

Premiums 

Year 

Amount 

Charged,  Less 

Fraction 

Premiums 

Written         Term 

Covered 

Reinsurance 

Unearned 

Unearned 

1918     One  year  or  less.. 

.     $33,631,300 

$118,032.59 

Yz 

$59,016.30 

APPENDIX  447 


LXI 
MARINE  INSURANCE  BINDER 

BLANK  &  CO.  No. 

Insurance 


To Blank  Insurance  Co 

Insure  for John  Jones 

For  account  of. .   .  .Henry  Smith Loss  payable  to John  Jones. 

on (description  of  subject  matter) 


Valued   at. . 

Per    

At  and  from. 
To   


.(Here  clauses  and  warranties). 


Bill  of  Lating  dated: Time  of  J. 


f  Sailing  . . 
Arriving 


IQ2 

Rate per  cent.     Premium approved 

Form  No. 


448    INSURANCE  PRINCIPLES  AND  PRACTICES 


LXIl 
MARINE  CARGO  POLICY 


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APPENDIX 


449 


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V 


450    INSURANCE  PRINCIPLES  AND  PRACTICES 

LXII — Continued 
CARGO  FORM  MARINE  OPEN  POLICY  ON  EXPORTS 

JOHN  JONES  &  COMPANY 

1.  For  account  of  whom  it  may  concern. 

2.  Loss,  if  any,  payable  to  Them  or  Order. 

3.  To  cover  all  goods  and/or  merchanidse  shipped  by  John  Jones  &  Company, 
(hereinafter  referred  to  as  the  Assured),  or  by  others  for  their  account,  or 
in  which  they  may  have  an  interest,  or  for  which  they  may  receive  instruc- 
tions to  insure;  said  instructions  to  be  given  in  writing  prior  to  sailing  of 
vessel  and  prior  to  known  or  reported  loss  or  damage. 

4.  Per  steamer  and/or  steamers  including  vessels  propelled  by  oil,  gas  and/or 
electric  machinery  and/or  connecting  railroad  conveyances. 

5.  Sailing  on  and  after  February  13th,  1919. 

6.  To  be  Insured  at  and  from  Philadelphia,  Pa.,  to 

7.  To  cover  on  merchandise,  consisting  principally  of 

subject  to  the  following  conditions; 

8a.  While  Watereorne: 

Subject  to  3%  Particular  Average  on  each  Shipping  Case  or  Package. 
Subject  to  5%  Particular  Average  on  each  Shipping  Case  or  Package. 
Free  of  particular  average,  unless  the  vessel  be  stranded,  sunk,  burned 
or  in  collision. 

8b.  While  on  Land: 

While  goods  are  on  railroad  or  other  land  conveyance,  only  the  risks  of 
fire,  collision,  derailment  and  loss  occasioned  by  rising  navigable  water  are 
covered  under  this  policy. 

While  goods  are  on  wharf,  the  risks  of  fire  and  rising  navigable  water 
only  are  covered  by  this  policy. 

9.  It  is  understood  and  agreed  that  this  insurance  attaches  from  the  time  the 
goods  leave  factory,  store,  or  warehouse  at  initial  point  of  shipment  and 
covers  thereafter  continuously,  in  due  course  of  transportation,  until  same 
are  delivered  at  store  or  warehouse  at  destination,  but  only  from  and  to  the 
ports  and/or  places  as  declared  to  this  Company;  but  that  on  shipments  to 
River  Plate  Ports  the  risk  hereunder  shall  cease  upon  arrival  of  the  goods 
at  any  shed  (transit  or  otherwise),  store,  custom  house  or  warehouse  or 
upon  the  expiry  of  ten  days  subsequent  to  landing,  whichever  may  first 
occur,  and  that  on  shipments  to  Russia,  Siberia,  China,  India,  East  Indies, 
North  and  West  Coast  of  South  America  and  Mexico,  the  risk  hereunder 
shall  terminate  upon  discharge  of  the  goods  from  the  vessel. 

10.  Valued,  for  insurance  purposes  at 

11.  This  policy  shall  not  be  vitiated  by  any  unintentional  error  In  description  of 
voyage  or  interest,  or  by  deviation,  provided  the  same  be  communicated  to 
the  insurers  as  soon  as  known  to  the  assured,  and  an  additional  premium 
paid  if  required,  but  it  is  understood  and  agreed  that  this  clause  does  not, 
in  any  way,  cover  the  risk  of  war,  riot  or  civil  commotion,  or  prejudice  the 
printed  wording  of  the  policy  excluding  risks  of  this  nature. 

12.  Including  risk  of  lighterage  to  and  from  the  vessel,  each  craft  or  lighter  to 
be  considered  as  if  separately  insured. 

13.  'Fhe  presence  of  the  Negligence  Clause  and/  or  latent  Defect  Clause  In  the 
Bills  of  Lading,  and/or  Charter  Party,  not  to  prejudice  this  insurance. 


APPENDIX  45 1 

LXU— Continued 


14.  Seaworthiness  of  vessel  and/or  vessels  and/or  craft  is  hereby  admitted 
as  between  the  Underwriters  and  Assured. 

15.  The  risks  covered  by  this  policy  are  to  include  loss,  damage  or  expense 
resulting  from  explosion,  howsoever  or  wheresoever  occurring  but  it  is 
specially  understood  and  agreed  that  the  above  wording  is  not  intended 
to  cover  the  risks  of  war,  riot  or  civil  commotion  or  to  in  any  way  prejudice 
the  printed  wording  of  the  policy  excluding  risks  of  this  nature. 

16.  This  policy  also  covers  the  customs  duties  chargeable  upon  the  merchandise 
insured  hereunder  upon  arrival  and  entry;  and  in  case  of  particular  aver- 
age to  the  charge  of  the  Company,  the  same  percentage  of  damage  will  be 
made  good  upon  the  amount  of  duties  so  insured  as  on  the  amount  of  goods, 
for  which  insurance  a  premium  as  agreed  upon  is  to  be  charged.  It  is  also 
agreed  that  the  assured  shall,  when  the  insurer  so  selects,  surrender  the 
merchandise  to  the  customs  authorities  and  recover  duties  thereon  as 
provided  by  law.  In  which  event  the  claim  under  this  policy  shall  be  for 
a  total  loss  of  such  portion  at  insured  value  as  provided  therein,  and 
expenses  only. 

17.  In  case  of  damage  affecting  labels  only,  loss  to  be  limited  to  an  amount 
sufficient  to  pay  the  cost  of  new  labels  an(f  relabelling  the  goods. 

18.  Machinery  Clause: 

In  case  of  loss  or  injury  to  any  part  of  a  machine,  consisting,  when  com- 
plete for  sale  or  use,  of  several  parts,  the  insurers  shall  only  be  liable,  for 
the  insured  value  of  the  part  lost  or  damaged. 

/Warranted  that  this  insurance  shall  not  inure  to  the  benefit  of  any 
carrier. 

19.  This  Company  not  to  be  liable  for  more  than  $ ,  per  any  one  vessel 

or  conveyance,  or  in  any  one  place  at  any  one  time,  unless  otherwise  agreed 
upon. 

20.  This  policy  to  be  deemed  continuous,  and  to  cover  all  shipments  as  herein 
pjovided,  until  cancelled  by  either  party  giving  the  other  thirty  days'  written 
notice  to  that  effect.  However,  such  notice  of  cancellation  shall  not  preju- 
dice any  risk  then  pending. 

It  is  expressly  understood  and  agreed,  anything  to  the  contrary  in  this 
Policy  notwithstanding,  that  on  shipments  to  ports  and/or  places  on  the 
Continent  of  Europe,  in  countries  at  war,  the  risk  hereunder  shall  cease 
upon  discharge  of  the  merchandise  from  the  vessel  at  seaport. 

The  effect  of  this  stipulation  to  terminate  is  ^o  any  country  upon  the  estab- 
lishment of  peace  therein. 

Warranted  not  to  cover  the  interest  of  any  partnership  corporation,  asso- 
ciation or  person,  insurance  for  whose  account  would  be  contrary  to  the 
Trading  with  the  Enemy  Acts,  or  other  statutes  or  prohibitions  of  the 
United  States. 


452    INSURANCE  PRINCIPLES  AND  PRACTICES 


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APPENDIX  457 

LXIV 

MARINE  PROTECTION  AND  INDEMNITY  CLAUSE 

And  we  further  agree  that  if  the  assured  shall  become  liable  to  pay  and  shall 
pay  any  sura  or  sums  in  respect  of  any  responsibility,  claim,  demand,  damages 
and/or  expenses,  or  shall  incur  any  other  loss  arising  from  or  occasioned  by 
any  of  the  following  matters  or  things  during  the  currency  of  this  Policy  in 
request  to  the  ship  hereby  insured,  that  is  to  say: — 

Loss  or  damage  in  respect  of  any  other  ship  or  boat  or  in  respect  of  any 
goods,  merchandise,  freight  or  other  things  or  interests  whatsoever,  on 
board  such  other  ship  or  boat,  caused  proximately  or  otherwise  by  the 
vessel  insured  in  so  far  as  the  same  is  not  covered  by  the  running  down 
clauses  hereto  attached. 

Loss  or  damage  to  any  goods,  merchandise,  freight  or  other  things  or 
interests  whatsoever,  other  than  as  aforesaid,  whether  on  board  said  steam- 
ship or  not,  which  may  arise  from  any  cause  whatever. 

Loss  of  life  or  personal  injury  and  from  payments  made  on  account  of 
life  or  other  salvage. 

Loss  or  damage  to  any  harbor,  dock,  graving  or  otherwise,  slipway,  way, 
gridiron,  pontoon,  pier,  quay,  jetty,  stage,  buoy,  telegraph  cable,  or  other 
fixed  or  movable  thing  whatsoever,  or  to  any  goods  or  property  in  or  on  the 
same,  howsoever  caused. 

Any  attempted  or  actual  raising,  removal  or  destruction  of  the  wreck  of 
the  said  steamship  or  the  cargo  thereof,  or  any  neglect  or  failure  to  raise, 
remove  or  destroy  the  same. 

Any  sum  or  sums  for  which  the  assured  may  become  liable  or  incur  from 
causes  not  hereinbefore  specified,  but  which  are  or  have  heretofore  been  ab- 
solutely or  conditionally  recoverable  from  or  undertaken  by  the   

Protective  Association,  Limited,   and/or    

Association. 

We  will  pay  the  assured  such  proportion  of  such  sum  or  sums  so  paid,  or 
which  may  be  required  to  indemnify  the  assured  for  such  loss  as  our  respective 
subscriptions  bear  to  the  Policy  value  of  the  ship  hereby  assured,  and  in  case 
the  liability  of  the  assured  has  been  contested  with  the  consent  in  writing  of  two- 
thirds  of  the  Underwriters  on  the  ship  hereby  insured  in  amount,  we  will  also 
pay  a  like  proportion  of  the  costs  which  the  assured  shall  thereby  incur  or  be 
compelled  to  pay. 

Notwithstanding  the  foregoing  this  Policy  is  warranted  free  from  any  claim 
arising  directly  or  indirectly  under  Workmen's  Compensation  Acts  of  any  State 
or  Nation. 

Attached  to  and  forming  a  part  of  Policy  No ,  of  the 

Insurance  Company,  of 

Agent 


458    INSURANCE  PRINCIPLES  AND  PRACTICES 

LXV 

WAR  RISK  CLAUSE 

It  is  agreed  that  this  insurance  includes  the  risk  of  capture,  seizure  or  destruc- 
tion or  damage  by  men  of  war,  by  letters  of  mart,  by  takings  at  sea,  arrests, 
restraints,  detainments  and  acts  of  kings,  princes  and  people,  authorized  by  and 
in  prosecution  of  hostilities  between  belligerent  nations;  but  excluding  claims 
for  delay,  deterioration  and/or  loss  of  market  and  warranted  not  to  abandon  in 
case  of  capture,  seizure  or  retention,  until  after  condemnation  of  the  property  in- 
sured, nor  until  ninety  days  after  notice  of  said  condemnation  is  given  to  these 
Assurers.  Also  warranted  not  to  abandon  in  case  of  blockade,  and  free  from 
any  claim  for  loss  or  expense  in  consequence  of  blockade  or  of  any  attempt  to 
evade  blockade;  but  in  event  of  blockade,  to  be  at  liberty  to  proceed  to  an  open 
port,  and  there  end  the  voyage. 

Foregoing  clause  does  not  cover  any  luar  risks  on  shore. 


LXVI 

ALIEN  ENEMY  WARRANTY 

Warranted  not  to  cover  the  interest  of  any  partnership,  corporation,  associa- 
tion or  person,  insurance  for  whose  account  would  be  contrary  to  the  trading 
with  the  enemy  acts  or  other  statutes  or  prohibitions  of  the  United  States  and/or 
British  Governments. 


LXVII 

EMBARGO  WARRANTY 

Warranted  free  from  claim  for  loss,  damage  or  expense  in  consequence  of 
any  prohibition,  restriction  or  embargo  of  or  by  the  Government  of  the  United 
States  of  America  or  of  any  violation  or  attempted  violation  thereof. 


LXVIII 


WARRANTY  AGAINST  CAPTURE 


Warranted  free  from  claim  arising  from  capture,  seizure,   arrest,  restraints, 
pre-emption  or  detainments  by  the  Government  of  the  United  States. 


LXIX 


EXPLOSION  CLAUSE 


The  risks  covered  by  this  policy  are  to  include  loss,  damage  or  expense  result- 
ing from  explosion  howsoever  and  wheresoever  occurring. 


APPENDIX  459 

LXX 

DEVIATIOxN  CLAUSE 

This  policy  shall  not  be  vitiated  by  any  unintentional  error  in  description  of 
voyage  or  interest,  or  by  deviation  of  vessels  from  voyage  described,  provided 
the  same  be  communicated  to  assurers  as  soon  as  known  to  the  assured,  and  an 
additional  premium  paid  if  required. 


LXXI 
WARRANTY  OF  USE 

Warranted  to  be  used  solely  for  private  pleasure  purposes  and  not  to  be  hired 
or  chartered  unless  approved  and  permission  endorsed  hereon. 


LXXI  I 

AVERAGE  CLAUSE 

It  is  understood  and  agreed  that  no  average  is  to  be  deducted  in  case  of  total 
loss  payment  where  the  vessel  does  not  remain  in  specie,  or  where  there  is  such 
payment  with  the  transfer  of  all  salvage  as  provided  for  in  the  Policy. 


LXXIII 

EXTENSION  OF  COVERAGE 

Should  the  vessel  at  the  expiration  of  this  policy  be  at  sea  or  in  distress  or  at 
a  port  of  refuge  or  of  call,  the  interest  hereby  insured  shall,  provided  previous 
notice  be  given  to  the  Underwriters,  be  held  covered  at  a  pro-rata  monthly 
premium  to  her  port  of  destination. 


LXXIV 

F.  P.  A.  CLAUSE 

Warranted  free  from  particular  average,  injury,  death,  mortality,  loss  jetti- 
son, and/or  washing  overboard,  unless  caused  by  stranding,  sinking,  burning  or 
collision,  but  to  pay  landing,  forwarding  and  special  charges  if  incurred,  and 
general  average  as  per  Foreign  Statement  or  York-Antwerp  rules  if  so  made  up. 

Warranted  free  from  any  claims  for  prohibition  and/or  interdiction  of  trade 
and/or  enforcement  of  sanitary  regulations. 


LXXV 
EXTENDED  COVERAGE 

To  cover  from  the  time  of  leaving  consignor's  office  until  delivered  to  con- 
signee at  the  place  of  address. 


460    INSURANCE  PRINCIPLES  AND  PRACTICES 


LXXVI 
WARRANTY  OF  SAFETY 
Warranted  in  safety  on  


LXXVII 
WARRANTY  OF  NEUTRALITY 
Warranted  neutral  ship  and  neutral  property. 


LXXVIII 
WARRANTY  NOT  TO  ABANDON 

The  assured  warrants  not  to  abandon  in  case  of  capture,  seizure  or  detention, 
until  after  the  condemnation  of  the  property  insured;  nor  until  ninety  days  after 
notice  of  said  condemnation  is  given  to  this  company. 


LXXIX 
REDUCTION  OF  POLICY 

Any  and  all  sums  paid  hereunder  shall  reduce  this  policy  by  the  amounts  so 
paid,  unless  restored  by  the  payment  of  new  premium,  and  then  this  policy  shall 
be  in  force  for  the  original  amount. 


LXXX 
SAILING  WARRANTY 

Neiu  York  Harbor — To  include  Upper  and  Lower  New  York  Bays,  inside  a 
line  drawn  from  Sandy  Hook  to  Norton's  Point,  North  River  as  far  as  Piermont, 
East  River  as  far  as  Throggs  Neck,  and  tributary  inland  waters,  and  the  adja- 
cent inland  waters  of  New  Jersey. 


LXXXI 
P.  P.  I.  CLAUSE 
"Policy  Proof  of  Interest." 

LXXXII 
INCEPTION  OF  RISK  CLAUSE 
Risk  to  commence  on  expiry  of  previous  policies. 


APPENDIX  461 

LXXXIII 

F.  P.  A.  CLAUSE 

Free  of  all  particular  average  under   (5)    per  cent,  on  each  case  Including 
breakage,  if  caused  by  the  vessel  being  stranded,  sunk,  burnt,  or  in  collision. 


LXXXIV 
LOADING  WARRANTY 
Warranted  not  to  load  or  carry  crude  petroleum,  naptha,  benzine  or  gasoline. 


LXXXV 

RETURN  OF  PREMIUM 

To  return for  each  30  consecutive  days  the  vessel  is  laid  up  and 

out  of  commission. 


LXXXVI 

GOODS  IN  ENEMY  TERRITORY 

//  is  hereby  mutually  understood  and  agreed  that  this  policy  ceases  to  apply 
on  goods  in  any  country  with  which  the  United  States  and/or  Great  Britain 
May  be  at  war,  or  to  goods  in  territory  in  occupation  of  any  hostile  power. 


LXXXVII 

LIGHTERAGE  CLAUSE 

To  cover  the  risk  of  lighterage  to  or  from  the  vessel — each  craft  or  lighter  to 
be  considered  as  if  separately  insured. 


LXXXVIII 

MACHINERY  CLAUSE 

In  case  of  loss  of  any  part  of  a  machine  consisting,  when  complete  for  sale  or 
use,  of  several  parts,  the  Insurers  shall  only  be  liable  for  the  insured  value  of 
part  lost. 


462    INSURANCE  PRINCIPLES  AND  PRACTICES 


LXXXIX 

LATENT  DEFECT  CLAUSE 

This  insurance  policy  is  also  specially  to  cover  (subject  to  the  free  of  average 
warranty)  loss  of,  or  damage  to,  hull  or  machinery,  through  the  negligence  of 
master,  charterers,  mariners,  engineers,  or  pilots,  or  through  explosions,  burst- 
ing of  boilers,  breakage  of  shafts,  or  through  any  latent  defect  in  the  machinery 
or  hull,  provided  such  loss  or  damage  has  not  resulted  from  want  of  due  dili- 
gence by  the  owners  of  the  ship,  or  any  of  them,  or  by  the  managers,  masters, 
mates,  engineers,  and  pilots  or  crew  not  to  be  considered  as  part  owners  withia 
the  meaning  of  this  clause  should  they  hold  shares  in  the  steamer. 


XC 

CANCELLATION  CLAUSE 

This  policy  is  deemed  continuous,  but  either  party  may  cancel  it  by  giving 
fifteen  days'  written  notice  thereof  to  the  other,  but  said  cancellation  shall  be 
without  prejudice  to  any  risk  then  pending. 


XCI 

VALUATION  CLAUSE 

The  said  ship,  etc.,  for  so  much  as  concerns  the  assured,  by  agreement  between 
the  assured  and  insurers  in  this  policy,  are  and  shall  be  valued  as  follows:   hull, 

tackle,  apparel  and  furniture  $ ,  machinery  and  boilers  $ 

Average  payable  on  each  valuation  separately,  or  on  the  whole. 


XCII 

LOADING  WARRANTY 

Warranted  not  to  be  loaded  in  excess  of  her  registered  tonnage  with  either 
lead,  marble,  stone,  coal  or  iron;  also  warranted  not  to  be  loaded  with  lime 
under  deck;  and  if  loading  with  grain,  warranted  to  be  loaded  under  the  inspec- 
tion of  the  Surveyor  of  the  Board  of  Underwriters,  and  his  certificate  as  to  the 
proper  loading  and  seaworthiness  obtained. 


XCIII 

F.  P.  A.  A.  C.  CLAUSE 

Warranted  free  of  particular  average  unless  caused  by  stranding,  sinking, 
burning  or  collision. 

XCIV 

WARRANTY  AGAINST  CAPTURE 

Warranted  free  from  any  claim  arising  from  capture,  seizure,  arrests,  re- 
straints, pre-emption,  detainments  or  confiscation  by  the  British  Government  or 
their  allies  or  by  the'  Government  of  the  United  States  of  America. 


APPENDIX  463 

xcv 

F.  P.  A.  E.  C.  CLAUSE 

Free  of  particular  average  unless  the  vessel  be  stranded,  sunk,  burnt  or  in 
collision. 

XCVI 

SAILING  WARRANTY 

Warranted  not  to  ply  on  the  Great  Lakes  between  December  2nd.  and  April 
15th. 

XCVII 

LEAKAGE  CLAUSE 

Not  liable  for  leakage  unless  the  vessel  be  stranded  or  in  collision,  or  it  be 
caused  by  forced  discharge  of  cargo  at  a  port  of  distress,  or  the  same  be  caused 
by  explosion,  or  by  the  vessel  coming  in  contact  with  any  floating  or  stationary 
object;  provided  that  in  all  the  above  cases  the  leakage  shall  amount  to  over  one 
per  cent  of  the  entire  cargo  on  board.  A  deduction  to  be  made  from  all  settle- 
ments of  one-fourth  of  one  per  cent  allowance  for  ordinary  leakage. 

XCVIII 

F.  P.  A.  CLAUSE 
Subject  to per  cent.,  Particular  Average. 


XCIX 

RIOT  AND  CIVIL  COMMOTION  CLAUSE 

In  consideration  of  an  additional  premium  of per  cent  (such  premium 

being  subject  to  revision  from  day  to  day),  it  is  agreed  that  this  policy  shall 
also  cover  destruction  of  the  property  insured  or  damage  done  to  it  by  strikers, 
locked-out  workmen,  or  persons  taking  part  in  labor  disturbances,  or  riots,  or 
civil  commotions,  but  warranted  free  of  claim  for  loss,  damage,  or  expense 
arising  from  deterioration,  loss  of  market  or  delay,  or  from  extra  handling  or 
storage. 


SUBROGATION  WARRANTY 

Warranted  by  the  assured  that  this  insurance  shall  not  enure  directly  or 
indirectly  to  the  benefit  of  the  carrier  or  other  bailee,  by  stipulation  in  bill  of 
lading  or  otherwise,  and  any  breach  of  this  warranty,  and  any  act  or  agreement 
by  the  assured,  prior  or  subsequent  hereto,  whereby  any  carrier  or  party  liable 
for  or  on  account  of  loss  of  or  damage  to  any  property  insured  hereunder,  is 
given  the  benefit  of  any  insurance  effected  thereon,  shall  render  this  policy  of 
insurance  null  and  void. 


464    INSURANCE  PRINCIPLES  AND  PRACTICES 

CI 

STATEMENT  OF  MARINE  INSURANCE  MUTUAL 

THE  MUTUAL  INSURANCE  COMPANY 

INCOME 

Gross  premiums   $6,684,891   55 

Deduct  reinsurance  premiums $1,450,658  09 

return  premiums   306,278  92 

1,756,937  01 

Total  net  premiums  written $4,927,954  54 

Interest: 

Bonds  and  stocks $418,106  66 

Deposits  94,547  09 

From  other  sources 25,463  75 


Total    538,117  50 

Rents     361,876  35 

Miscellaneous   194  15 

Gain   on   exchange 740  13 

Income  tax  withheld  at  source 3,739  93 

Certificates  of  profits  acquired 4,310  00 

Sundry  fees 160  00 

Gross  profit  on  sale  or  maturity  of  ledger  assets, 
viz.: 

Bonds    $2,034  93 

Stocks    61,538  40 


6S,573  33 


Total  Income    $5,900,665  93 

Ledger  Assets,  December  31  of  previous  year 19,361,364  77 


Total    $25,262,030  70 


DISBURSEMENTS 


Losses  less  discounts $4,105,973  64 

Deduct  salvage    $239,186  51 

reinsurance    1,947,733  08 

2,186,919  59 


Net  losses  paid $1,919,054  05 

Loss  adjustment  expense 7,369  25 

Agents'   compensation    including    brokerage 340,278  47 

Agent's    allowances    2,750  00 

Salaries   and   fees 428,546  14 

Rent    53,542  51 

Furniture  and  fixtures 5,582  76 

Inspections   and   surveys 5,404  80 

Federal  taxes   151,562  39 


APPENDIX  465 

CI — Continued 
Taxes,  licenses  and  fees: 

State,  county,  municipal $83,081  37 

Insurance  department   139  87 

All  other  except  real  estate 6  00 

83,227  24 

Postage,   telegraph,  telephone,   exchange,   express 5,521  25 

Legal    expense    8,072  20 

Advertising  and  subscriptions,  $35,854.02;  printing  and  station- 
ery,  $10,713.25 46,567  27 

Miscellaneous,  including  $23,961.18  discount  on  premiums; 
$4,532.28  expense  and  charges  of  foreign  bankers;  $11,644.92 
taxes   on   cotton   premiums;   $3,135.96   income   tax   witheld    at 

source;  $992.81  suspended  notes  charged  off 44,747  14 

Scrip  or  certificates  of  profit  redeemed  in  cash 3,270,000  00 

Interest  to   scripholders 343,000  00 

Real  estate  repairs  and  expense,  $121,981.24;  taxes,  $92,260.60..  214,241  84 

Total   Disbursements    $6,828,467  3 1 

Balance    $18,433,563  39 

LEDGER  ASSETS 

Book  value  of  real  estate $3,975,000  00 

Book  value  of  bonds,  $7,385,153;  stocks,  $2,424,213.15 9,809,366  15 

Cash  in  company's  office 197  36 

Deposits  in  trust  companies  and  banks  not  on  interest 150,000  00 

Deposits  in  trust  companies  and  banks  on  interest 2,822,612  25 

Bills  receivable  taken  for,marine  and  inland  risks 1,380,222  88 

Funds  with  foreign  bankers 286,904  00 

Certificates  of  profits  owned  by  company 4,320  00 

Statutory  deposit  with  state  of  Queensland,  Australia 4,765  00 

Suspended  notes    175  75 

Total    $18,433,563  39 

NON-LEDGER    ASSETS 

Interest  due  and  accrued: 

Bonds    $76,497  72 

Other  assets    19,392  73 

Total    95,890  45 

Rents  due   and   accrued 23,106  40 

Market  value  of  real  estate  over  book  value 63,700  00 

Market  value  of  bonds  and  stocks  over  book  value 805,807  81 

Reinsurances  recoverable  on  paid  losses 62,734  31 

Gross  Assets   $19,484,802  36 

DEDUCT  ASSETS  NOT  ADMITTED 

Company's  certificates   of  profits $4,320  00 

Bills  receivable,  past  due,  taken  for  risks 175  75 

Total    4,495  75 

Total  Admitted  Assets $19,480,306  61 


466    INSURANCE  PRINCIPLES  AND  PRACTICES 


CI — Continued 

LIABILITIES 

Losses  and  claims  for  losses: 

Adjusted  and  unpaid $307,654  70. 

Unadjusted    4,229,374  30 

Resisted     20,000  00 


Total    $4,557,029  00 

Deduct    reinsurances    in    companies    authorized 

in   New    York 399,450  00 


Net  unpaid  losses  and  claims $4,157,579  00 

Unearned  premiums   914,521  45 

Principal  on  scrip  ordered  redeemed 266,581  48 

Interest  due  or  accrued   50,121  27 

Salaries  and  miscellaneous  accounts  due  or  accrued 12,283  18 

Estimated  amount  of  taxes  hereafter  payable 400,000  00 

Contingent  commissions  or  other  charges  due  or  accrued 127,012  92 

Reinsurance  and  return  premiums  due  other  companies 503,939  46 

Income  tax  withheld  at  source 3,739  93 

Surplus  on  redemption  of  withheld  certificates  of  profit 22,592  54 

Outstanding  certificates  of  profit   (scrip) 6,140,100  00 


Liabilities    $12,598,471  23 

Surplus  to  policyholders 6,881,835  38 


Total    $19,480,306  61 


RISKS  AND  PREMIUMS 

Marine  Risks  Premiums 

In  force  December  31,  1917 $174,606,430  $1,069,550  96 

Written  or  renewed  in  1918 778,646,862  6,684,891  55 

Totals   $953,253,292  $7,754,442  51 

Deduct  expirations  and  cancellations 884,296,448  6,753,508  18 

In  force  December  31,  1918 $68,956,884  $1,000,934  33 

Deduct   amount  reinsured 16,913,189  86,142  88 

Net  amount  in  force $52,043,655  $914,521  45 


APPENDIX 


467 


CII 


AUTOMOBILE  (PRIVATE  TYPE)  P.  L.,  P.  D.  L.  &  COLL   (FULL 

COVER)  POLICY 


{Hereinafter  called  the  Corporation)  Joes  hereby  agree  with  the  Assured  named  in  the  Declarations  attached  hereto,  and  herehy 
made  a  part  hereof,  as  follows : 


liwimace  Provided 


Definition  oT  Assured. 


liniuUoD  of  LiabUitj 


fixdusioDiL 


Boakniptc;. 


ABBJgMttenU 


Sobroeatioo. 


TheFc 


Agreement   I.    To  pay  any  loss  by  reason  of  the  liability  imposed  by  law  upon  ihe  Assured  for  damages  on  account  of  bodily  injuries 

including  death  at  any  time  resulting  therefrom,  accidentally  susuined  duriqg  the  policy  period  by  any  person  or  persons,  other  than  employees 
engaged  m  operatmg  or  caring  for  the  automobiles  covered,  as  the  result  of  the  owuersbip,  maintenance  or  use  of  any  of  the  automobiles 
coumcraied  and  described  in  Item  8  of  the  Declarations. 

Agreement  II.  To  pay  any  loss  by  reason  of  the  liability  imposed  by  law  upon  the  Assured  for  damages  on  account  of  injury  to,  or 
destruction  of  property  of  any  description  (other  than  property  of  the  Assured  or  property  of  others  used  by,  or  in  charge  of  the  Assured  or  any  of 
the  Assurcd's  employees,  or  carried  in  or  upon  the  automobiles  covered  hereby)  as  a  result  of  the  ov^ncrship,  maintenance  or  use  of  any  of  the 
automobiles  enumerated  and  described  in  Item  8  of  the  Declarations,  excluding,  however,  loss  of  use  of  property  so  injured  or  destroyed. 

Agreement  III.  To  pay  the  Assured  for  actual  loss  by  reason  of  injury  to  or  destruction  of  any  of  the  automobiles  enumerated  and 
described  in  Item  8  of  the  Declarations,  including  its  operating  equipment  whde  attached  thereto,  if  caused  solely  by  accidental  collision,  during 
the  policy  period,  with  another  object,  either  moving  or  stationary,  excluding,  however,  injury  or  destruction  by  fire  from  any  cause  whatsoever, 
and  injury  to  or  destruction  of  tires  due  to  puncture,  cat,  gash,  blow-out,  or  other  ordinary  lire  trouble,  and  excluding  in  any  event  injury  or 
destruction  of  lires  unless  caused  by  an  accidental  collision,  which  al^o  resulted  in  other  injury  or  destruction  of  the  insured  automobile. 

^oregoing  Agreements  are  Subject  to  the  Folloiving  Conditions: 

Condition  A.  The  Assured,  wherever  referred  to  in  this  Policy,  shall  include  the  Assured  named  in  the  Declarations  and  any  person  or 
persons  while  nJing  in  or  operating  any  of  the  automobiles  enumerated  and  described  m  Item  8  of  the  Declarations  for  private  or  pleasure 
purposes  or  for  making  busmess  calls,  CKcluding  commercial  delivery,  with  the  permission  of  the  said  named  Assured  or  with  the  pcrmissiotj 
of  any  adult  member  of  said  named  Assured's  household  who  is  not  a  chauffeur  or  a  domestic  servant. 

<1'^  The  Corporation's  liability  under  this  Policy  is  Lmited  as  expressed  in  Item  9  of  the  Declarations,  which  limits  shall  apply  to  each 
automobile  covered  hereby. 

(2)  In  addition  to  the  limits  expressed  in  Item  9  of  the  Declarations  the  Corporation  will  pay  all  expenses  resulting  from  claims  upon 
the  Assured  on  account  of  loss  as  aforesaid,  and  all  costs  taxed  against  the  Assured,  together  wuh  interest  thereon,  in  any  legal  proceedings 
defended  by  the  Corporation  according  to  the  agreements  and  conditians  of  this  Policy,  and  ail  interest  accruing  after  entry  of  judgment  to  date 
of  w»lisfaction  thereof,  upon  such  part  of  said  judgment  as  is  not  in  excess  of  the  limits  of  the  Corporations  liability  as  expressed  in  Item  9  of 
the  Declarations,  but  ^he  Assured  shall  not  voluntarily  assume  any  liability  nor  shall  the  Assured  without  the  written  consent  of  the  Corporation 
previously  given  incur  any  expense  or  settle  any  claim  except  at  his  own  cost  or  interfere  wuh  any  negotiation  for  settlement  or  any  legal  proceed- 
ing, except  that  the  Assured  Ttay  provide  at  the  Corporation's  expense  at  the.  time  of  the  accident  such  immediate  surgical  relief  as  is 
imperative.  Whenever  requested  by  the  Corporation,  the  Assured  shall  aid  lo  securing  information  and  evidence  and  the  attendance  of  witnesses 
and  in  effecting  settlements  and  in  prosecuting  appeals. 

Condition  B.  This  Policy  does  not  cover  as  regards  any  automobile  under  any  of  the  following  conditions ;  (i)  While  being  operated  or 
osed  by  any  person  contrary  to  law  as  to  age,  or  any  person  under  the  age  of  sixteen  (i  6)  years  where  no  statute  restricts  the  age,  (2)  while  being 
operated  on  used  in  an^  race  or  speed  test,  (3)  while  any  of  the  automobiles  insured  under  this  Policy  are  being  used  for  towmg  or  pro- 
pelling any  trailer  or  any  other  vehicle  used  as  a  trailer,  (4)  injuries  to  any  employee  of  the  Assured  while  engaged  in  or  operating  or  caring 
for  the  automobiles  covered  hereby  ;  (5)  while  being  operated  or  used  elsewhere  than  within  the  limits  of  the  United  States  of  America  or  the 
Dominion  of  Canada  ;  (6)  loss  by  reason  of  the  liability  under  any  Workmen's  Compensation  Law. 

Condition  C.  Upon  the  occurrence  of  an  accident  covered  by  this  Policy,  the  Assured  shall  give  immediate  written  notice  thereof, 
with  the  fullest  information  obtainable  at  the  time,  to  the  Corporation's  Home  Office  at  or  to  the  Corporation's  authorued  ageat 

If  a  claim  IS  made  on  account  of  such  accident  the  Assured  shall  give  like  notice  thereof  with  full  particulars.  The  Assured  shail  at  all  times 
render  to  the  Corporation  all  co-operation  and  assistance  in  his  power. 

Condition  D.  If  thereafter  any  suit,  even  if  groundless,  is  brought  against  the  Assured  to  enforce  a  claim  for  damages  on  account  of  ao 
accident  covered  by  this  Policy,  the  Assured  shall  immediately  forward  10  the  Corporation  every  summons  or  other  process  as  soon  as  the  same 
shall  have  been  served  on  him,  and  the  Corporauon  will,  at  its  own  cost,  and  subject  to  the  liniitatiODS  referred  to  in  Condition  A  hereof,  defeod. 
or  at  its  option,  settle  such  suit  in  the  name  and  on  behalf  of  the  Assured. 

Condition  E.  (1)  The  insolvency  or  bankruptcy  of  the  Assured  shall  not  relieve  the  Corporation  from  the  payment  of  damages  for 
injuries  susuined  or  loss  occasioned  during  the  policy  period.  In  case  of  such  insolvency  or  bankruptcy  an  action  may  be  mainuined  by 
the  claimant  against  the  Corporation,  subject  to  the  terms  of  this  Policy,  for  an  amount  not  exceeding  the  amount  of  this  Policy.  (2)  No  assign- 
ment of  interest  under  this  Policy  shall  bind  the  Corporation  unless  the  consent  of  the  Corporation  shall  be  endorsed  thereon.  If  the  death,  * 
insolvency  or  bankruptcy  of  the  Assured  shall  occur  during  the  policy  period,  this  Policy,  during  the  unexpired  portion  of  such  period,  shall  cover 
the  legal  repiesentative  of  the  Assured. 

Condition  F.  In  case  of  payment  of  loss  or  expense  under  this  Policy  the  Corporation  shall  be  subrogated  to  alt  lights  of  the  Assored 
to  the  extent  of  such  payment,  and  the  Assured  sh41  execute  all  papcts  required  and  sball  cooperate  with  the  Corporation  to  icctire  lo  tba 
CorporatJOQ  its  rights. 


468    INSURANCE  PRINCIPLES  AND  PRACTICES 


CII — Continued 


Odnrlaaonncft  Condition  O.     If  the  Assured  has  other  ittsoraoce  tgaina  the  low  covered  by  this  Policy,  ihe  Aiwred  shall  noi  be  enritM  to  i 

ftom  the  Corporation  (bra  larger  proportion  of  the  entire  lou  than  the  proportion  that  the  amount  of  this  PoUcy  bears  to  the  loul  arrtount  of  bis 
vahd  and  collectible  insurance  agauut  such  lo». 

AppraU.  Condition  H.     In'tho  event  of  injury  to  or  deatractlon  of  any  of  the  Assurer's  automobiles  the  nature  and  expense  of  the  injury  t^r 

which  the  Corporation  is  liable  or  the  value  of  the  automobile  destroyed  raiy  be  determined  by  the  parties  hereto,  if  possible  ;  otherwise  by  two 
Appraisers,  one  lo  be  chosen  by  tire  Assured  and  one  by  llie  Corporation.  The  two  Appraisers  so  chosen,  if  they  are  not  able  to  agree,  may  select 
the  third  and  tne  award  in  writing  of  any  two  of  the  Appraisers  shall  determine  the  nature  and  expense  of  the  repairs  to  be  made  at  the  cost  of 
the  Corporation  or  the  value  of  the  automobile  destroyed  The  Corporation  and  the  Assured  shall  pay  the  Appraiser  respectively  selected  by 
each  and  shall  bear  equally  the  other  expenses  of  the  Appraisal  and  of  the  third  Appraiser  if  one  is  selected.  The  Corporation  may  accomplish 
any  repairs  determined  by  the  Appraisers  by  such  means  as  it  may  elect,  or,  at  the  option  of  the  Corporatiun,  may  replace  the  lulomobile  oc  pay 
in  money  the  amount  of  the  loss  as  fixed  by  the  Appraisers. 

Condition  I.  The  Corporation  shall  have  reasonable  time  and  opportunity  to  examine  any  tlanuRed  automobile  or  its  equipment  coveiwj 
hereby  before  repairs  are  undertaken  or  physical  evidence  of  the  damage  removed,  but  the  Assured  shall  not  be  prejudiced  hereunder  by  any  act 
on  his  pan  or  in  his  behalf  undertaken  for  the  protection  or  salvage  of  the  damaged  automobile  or  its  equipment. 

OneellittoD.  Condition  J.     This  Policy  may  be  cancelled  at  any  time  at  the  request  of  the  Assured,  or  by  the  Corporation,  upon  written  notice  t» 

the  other  party,  slating  when  thereafter  cancellation  shall  become  effective,  and  the  date  of  cancellation  shall  then  be  the  end  of  the  policy  period. 
If  such  cancellation  is  at  the  Corporations  request,  the  earned  premium  shall  be  computed  and  adjusted /r^  rata.  If  such  canceUation  is  at  the 
Assured's  request,  the  earned  premium  shall  be  computed  and  adjusted  at  short  rates,  in  accordance  with  the  table  printed  hereoD.  Notice  of  cao' 
cellatton  mailed  to  the  address  of  the  Assured  as  given  herein  shall  be  a  sufficient  notice,  and  the  Corporation's  check,  similarly-mailed  a  sufhcieat 
tender  of  any  unearned  premium 

dugeg  in  Policy.  Condition  K.     No  condition  or  provision  of  this  Policy  shall  be  waived  or  altered,  except  by  endorsement  attached  herettf,  signed  by  the 

Manager  and  Altorney  of  the  Corporation  for  the  United  Slates,  nor  shall  knowledge  possessed  by  any  Agent  or  by  any  other  person  be  held  t» 
effect  a  waiver  or  change  in  any  part  of  this  contract.  Changes  in  the  written  portions  of  the  Declarations  made  a  part  hereof  (except  XteoM 
7,  8  and  9)  may  be  made  by  the  Agent  countersigning  this  Policy,  such  changes  binding  the  Corporation  when  initialed  by  wch  Agent. 

Ageni.  Condition  L.     No  person  shall  be  deemed  an  Agent  of  the  Corporation  unless  such  person  is  authorized  in  writtog  as  racfa  Agent  by  Che 

Manager  and  Attorney  of  the  Corporation  for  the  United  Sutes. 

Special  .SueutM.  Condition  M.     If  any  of  the  terms  or  conditions  of  this  Policy  conflict  with  the  law  of  any  Sute  within  which  coverage  is  granted,  rnxk 

conSictuig  terms  and  conditions  shall  be  inoperative  in  such  Sute  in  so  far  as  they  are  in  conflict  with  such  law.  Any  specific  statutory  proviiiao 
in  force  in  any  Sute  within  which  coverage  is  granted  shall  supersede  any  condition  of  this  Policy  inconsistent  therewith 

Aocsptaoca.  Condition  N.     The  Assured  by  the  acceptance  of  this  Policy  declares  the  several  Statements  in  the  Declarations  to  be  tiwe,  ml  thi»  PoKof 

is  issued  in  considetation  thereof,  and  of  the  provisions  of  the  Policy  respecting  its  premium,  and  the  payment  of  such  premium. 


In  XHUneSS  TlCIbereof,  the  Corporation  has  caused  this  Policy  to  be  execoted  by  its  amJiorued  Monger,  acting  under  power  of  attorney,  btil  it  ikaB  Mt 
be  in  force  tutil  countersigned  by  a  duly  antborized  General  Agent  of  the  Corporation. 


OO' 


Couvlersigned  at_ 


iP«-* 


,\*«-' 


v_0" 


.^^ 


Bmagva 


Snagv  gad  AlUmtf/trtuVmlii  dim 


Oateral  ^gntt^ 


This  space  is  for  the  attaciuaect  of  the  Declaratioiu  a*  in  the  PoGcy  provided,  whicii;  when  attached,  to  be 
I  a  part  of  the  Policy. 


APPENDIX    .  469 

cm 

AUTOMOBILE  CERTIFICATE  OF  INSURANCE 


Policy  No Entry  No 

Assured,    

Date  of  Entry ,  19 Amt.  Insured,  $ 

Model  Year Trade   Name 

Type  of  Body  (If  Truck,  state  Tonnage)  Factory  No.  Motor  No. 


New  or  Second  Hand  Cost  Date  Acquired 

$ 

Will  be  stored  at 

No.                Street                    City                    State 
Contents  Rate, Rate  for  this  entry, 


THE INSURANCE  COMPANY 

This  is  to  Certify,  That  the  party  or  parties  whose  name  or  names  appear 
above,  as  the  Assured  under  this  Certificate,  is  insured  subject  to  the  stipulation 
and  conditions  of 


Open  Policy  No. 


to  an  amount  not  exceeding Dollars 

on  the  Body,  Machinery  and  Equipment  of  the  Automobile  described  herein,  for 
not  exceeding  Three  Months  from  the  date  of  commencement  of  this  Certificate, 
or  until  this  Certificate  is  canceled  in  accordance  with  the  terms  of  the  Open 
Policy  under  which  it  issued. 

Any  loss  that  may  be  ascertained  and  proven  to  be  due  the  assured  under  this 


Certificate  shall  be  held  payable  to. 


as  interest  may  appear,  subject,  nevertheless,  to  all  the  terms  and  conditions  of 
this  Policy. 

This  Certificate  is  made  and  accepted  subject  to  the  stipulations  and  condi- 
tions of  the  Open  Policy  mentioned  herein,  which  is  hereby  made  a  part  of  this 
contract. 

In  Witness  Whereof,  this  Company  has  executed  and  attested  these  presents; 
but  this  Certificate  shall  not  be  valid  unless  countersigned  by  the  duly  authorized 
Agent  of  the  Company  at 

President 

Marine  Secretary 

Dated ,  19 

Agent 


470    INSURANCE  PRINCIPLES  AND  PRACTICES 


CIV 

AUTOMOBILE    ENDORSEMENT 

COLLISION  ENDORSEMENT 

($100.00  Deductible) 

Agency ,  IQ2 

In  consideration  of  an  additional  premium  of  $ but  subject  to  all 

conditions  of  this  Policy,  the  Perils  Insured  Against  hereunder  are  extended  to 
include  Accidental  Collision,  where  the  damage  from  such  collision  to  the  auto- 
mobile and/or  equipment  herein  described  is  in  excess  of  $1000.00,  each  accident 
being  deemed  a  separate  claim  and  said  sum  to  be  deducted  from  the  amount  of 
each  claim  when  determined;  excepting: 

(1)  Loss  or  damage  to  any  tire,  due  to  puncture,  cut,  gash,  blowout  or 
other  ordinary  tire  trouble;  and  excluding  in  any  event  loss  or  damage  to 
any  tire,  unless  caused  in  an  accidental  collision  which  also  causes  other 
loss  or  damage  to  the  insured  automobile; 

(2)  Loss  or  damage  ocurring  while  the  automobile  insured  is  engaged  in 
any  race  or  speed  contest  or  while,  being  operated  by  any  person  under  the 
age  limit  fixed  by  law  or  in  any  event  under  the  age  of  sixteen  years. 

In  the  event  of  loss  or  damage  to  said  automobile  whether  such  loss  or  dam- 
age is  covered  by  this  Policy  or  not,  the  liability  of  this  Company  under  this 
Policy  shall  be  reduced  by  the  amount  of  such  loss  or  damage  until  repairs  have 
been  completed,  but  shall  then  attach  for  the  full  amount  as  originally  written, 
without  additional  premium. 

The  amount  recoverable  for  accidental  collision  under  this  endorsement  shall 
not  exceed  the  actual  cash  value  of  the  property  at  the  time  of  any  loss  or 
damage,  but  shall  not  be  limited  by  the  amount  of  insurance  named  in  the  Policy 
to  which  this  endorsement  is  attached. 

All  other  terms  and  conditions  of  this  Policy  remaining  unchanged. 

Attached  to  and  forming  part  of  Policy  No ,  of  the 

INSURANCE  COMPANY, 

Agent 


APPENDIX  471 

cv 

AUTOMOBILE   ENDORSEMENT 

PROPERTY  DAMAGE  ENDORSEMENT  "B" 
(Including  Omnibus  Coverage) 

Agency ,  lg2 

In  consideration  of  an  additional  premium  of  $ but  subject  to  all 

the  conditions  of  this  Policy,  this  insurance  is  extended  to  cover  the  assured's 
legal  liability  to  other  persons  for  the  injury  to  or  destruction  of  the  property 
of  such  persons  (including  resultant  loss  of  use  of  such  property),  and  in  addi- 
tion thereto  the  legal  expenses  incurred  by  the  assured  with  the  consent  of  the 
Company  in  connection  with  such  injury  or  destruction,  resulting  solely  and  di- 
rectly from  the  ownership,  maintenance  or  use  of  the  automobile  herein  described, 
provided  such  injury  or  destruction  occurs  during  the  period  covered  by  the 
Policy;  subject,  however,  to  the  following  limitations  and  exclusions: 

(1)  The  property  of  the  assured,  or  in  charge  of  the  assured  or  of  any 
of  his  employees,  or  carried  in  or  upon  the  automobile  described  herein,  is 
excluded  from  this  coverage; 

(2)  This  Company's  liability  for  injur}'  or  destruction  is  limited  to  the 
actual  value  of  the  property  destroyed  at  the  time  of  its  destruction  and/or 
the  actual  cost  of  the  suitable  repair  of  the  property  injured,  but  in  no  case 
shall  this  Company  be  liable  with  respect  to  claims   (including  claims  for 

loss  of  use)    arising  from  one  accident  for  more  than  $ ,  and  in 

addition  thereto  the  legal  expenses  incurred  by  the  assured  with  the  consent 
of  the  Company. 

(3)  The  insurance  under  this  endorsement  does  not  attach  or  cover  while 
the  automobile  insured  is  engaged  in  any  race  or  speed  contest,  or  while 
being  operated  by  any  person  under  the  age  limit  fixed  by  law  or  in  any 
event  under  the  age  of  sixteen  years. 

It  is  a  condition  of  this  endorsement  that  if  action  be  brought  against  the 
assured  to  enforce  a  claim  for  damage  covered  hereby,  he  shall  immediately 
notify  the  Company  and  promptly  forward  to  It  every  summons  or  other  paper 
or  process  served  on  or  received  by  him  in  connection  therewith. 

It  is  a  condition  of  this  endorsement  that  the  assured  whenever  requested  by 
the  Company,  shall  aid  in  effecting  settlement,  securing  information  and  evi- 
dence, and  the  attendance  of  witnesses;  but  the  assured  shall  not  voluntarily 
assume  any  liability  or  interfere  in  any  negotiation  for  settlement  or  in  any 
legal  proceeding,  or  incur  any  expense  or  settle  any  claim  except  at  his  own 
cost,  without  the  written  consent  of  the  Company  previously  given. 

The  indemnity  provided  by  this  endorsement  is  so  extended  as  to  be  available, 
in  the  same  manner  and  under  the  same  conditions  as  it  is  available  to  the 
named  assured,  to  any  person  or  persons  while  riding  in  or  lawfully  operating 
any  of  the  insured  automobiles,  and  to  any  person,  firm  or  corporation  legally 
responsible  for  the  operation  thereof,  provided  such  use  or  operation  is  with  the 
permission  of  the  named  assured,  or,  if  the  named  assured  is  an  individual,  with 
the  permission  of  an  adult  member  of  the  named  assured's  household  other  than 
the  chauffeur  or  a  domestic  servant. 

The  unqualified  term  "Assured"  wherever  used  in  this  endorsement  shall  in- 
clude in  each  instance  any  other  person,  firm  or  corporation  entitled  to  indemnity 
under  this  endorsement,  but  the  qualified  term  "named  Assured"  shall  apply 
only  to  the  assured  named  in  the  Policy. 

If  any  person,  firm  or  corporation  other  than  the  named  assured  carries  valid 
and  collectible  insurance  covering  a  claim  also  covered  by  this  endorsement, 
such  other  person,  firm  or  corporation  shall  not  be  entitled  to  indemnity  under 
this  endorsement. 

All  other  terms  and  conditions  of  this  Policy  remaining  unchanged. 

Attached  to  and  forming  part  of  Policy  No ,  of  the 

INSURANCE  COMPANY. 

4  gent 


472    INSURANCE  PRINCIPLES  AND  PRACTICES 


cvi 


FIRE,  THEFT  AND  TRANSPORTATION  AUTOMOBILE  POLICY 

(Approved  by  the  National  Convention  of  Insurance  Commissioners  at  their 
December,  1919,  meeting  in  New  York.) 


No. 


Form  No.  2 


Snaurattr?  §ompng 


IN  CONSroERATION  OF  THE  PREMIUM  HEREINAFTER  MENTIONED 
Bdrs  SflHitrP  the  Assured  named  herein,  and  legal  representatives,  for  the  term  herein  specified,  to  an  amount  not  exceeding  the 
amount  of  insurance  herein  specified,  against  direct  loss  or  damage,  from  the  perils  insured  against,  to  the  Body,  Machinery 
and  Eqaipment  of  the  Automobile  described  herein  while  within  the  limits  of  the  United  States  (exclusive  of  Alaska,  the 
Hawaiian  Islands  and  Porto  Rico)  and  Canada,  mduding  while  in  building,  on  road,  on  railroad  car  or  other  conveyance,  f  eny 
or  inland  steamer,  or  coastwise  steamer  between  ports  within  said  limits.  The  following  are  the  perils  insured  against: 
Peifll  insured        (A)    Fire,  arising  from  any  cause  whatsoever;  and  Lightning; 

against  (B)    While  being  transported  in  any  conveyance  by  land  or  water,  the  stranding,  sinking,  colUs!on« 

burning  or  derailment  of  such  conveyance,  including  general  average  and  salvage  charges  for  which  the  Assured 
is  legally  liable. 

(C)  Theft,  robbery  or  pilferage,  excepting  by  any  person  or  persons  in  the  Assured's  household 
or  in  the  Assured's  service  or  employment,  whether  the  theft,  robbery  or  pilferage  occur  during  the  hours  of  such 
service  or  employment  or  not,  and  excepting  also  the  wrongful  conversion,  embezzlement,  or  secretion  by  a 
mortgagor  or  vendee  in  possession  under  mortgage,  conditional  sale  or  lease  agreement,  and  excepting  in  any  case. 
Other  than  in  case  of  the  theft  of  the  entire  Automobile  described  herein,  the  theft,  robbery  or  pilferage  of  tools 
and  repair  equipment. 


Amount,  $-. 


Rate. 


Premium,  $. 


Kame  of  Assured.. 


Address  of  Assured -^wii- 

no.  eTBxrr 


The  term  of  this  Policy  begins  at  noon  on  the — — .day  of ,  19 , 

and  ends  at  noon  on  the day  of ,  19. _«  Standard  time. 

Amount  of  Insurance^- - Dollars  ($ .) 


WARRANTIES 


1.    Assared's  occupation  or  business  is 


2. 

The  following  is  the  description  of  the  AutomotUe: 

uooa 

van 

LIST  ffllCE 

TRADE  NAME 

nPE  Of  BODY 

(ir  TflUCK.  ST«TE  TOIPUeO 

FACTORr  on  SERIAL 
nUMBER 

MOTOR  NO. 

NO.  Of 
CYLINDERS 

ADVERTISED 
HORSE  POWEB 

3.     The  farta  with  respect  to  the  purchase  of  the  Automobile  described  are  as  follows : 

PUBCMASED  BY  THE  ASSURED 

ACTUAL  COST  TO  ASSURED 
mCLUDINS  EOUIPMENT 

THE  AUTOUOBH.E  OESCRIBEO  IS  FULir  PAID  FOR  By  THE  ASSUREO  AM* 
IS  NOT  MORICAGEO  OR  OTHERWISE  EHCUMBEREO.  EXCEPT  AS  FOlLCWSl 

Month 

Teab 

NEW  OR  SeCONO-MAND 

4.    The  uses  to  which  the  Automobile  described  is  and  will  be  put,  are. 


6.    The  Automobile  described  is  usually  kept  in... 


(StMe  whetber  private  or  public) 


...garage,  Ioeated> 


The  Assured's  occupation  or  business  where  the  subject  of  this  insurance  is  used  in  connection  therewith,  the 
Warranties  by  the  description  of  the  Automobile  insured,  the  facts  A^ith  respect  to  the  purchase  of  same,  the  uses  to  which  it  is  and 

will  be  put,  and  the  place  where  it  is  usually  kept,  as  set  forth  and  contained  in  this  Policy,  are  statements  of 
facts  known  to  and  warranted  by  the  Assured  to  be  true,  and  this  Policy  is  issued  by  {he  Company  relying  upon  the  truth  thereof 


This  Company  shall  not  be  liable  for: 

(a)  Loss  or  damage  to  robes,  wearing  apparel,  personal  effects,  or  extra  bodies; 

(b)  Loss  or  damage  caused  directly  or  indirectly  by  invasion,  -insurrection,  riot,  civil  war  6t  COmmotiOB| 
militajy,  naval  or  usurped  power,  or  by  ordar  of  any  civil  authority. 

No  recovery  shall  be  had  under  this  Policy,  if  at  the  time  a  loss  occurs  there  bo  any  other  insurance  COTering 
such  loss,  which  would  attach  if  this  insurance  had  not  been  effected. 

This  Policy  shall  be  canceled  at  ajny  time  at  the  request  of  the  Assured,  in  which  case  the  Company  shall,  upaa 
demand  and  surrender  of  this  Policy,  refund  the  excess  of  paid  premium  above  the  customary  short  rate  premium 
ft*  the  expired  term.  This_  Policy  may  be  canceled  at  any  time  by  the  Companr  by  giving  to  the  Assured  a  five  (5)  days' 
wriuea  notice  of  cancellatioo  with  or  without  tender  of  the  excess  of  paid  prem^ am  above  the  pro-rata  premium  for  the  expired 


Pr«i»erty 
CKCtaded. 

War,  riot,  etc 


Other  insurance. 


CancettaGoa. 


APPENDIX  473 

CWl— Continued 

Umn,  which  excess  if  not  tendered  shall  be  refunded  on  demand.  Notice  of  cancellation  shall  state  that  ^id  excess  premioia 
(if  not  tendered)  will  be  refunded  on  demand  Notice  of  cancellation  mailed  to  the  address  of  the  Assured  stated  in  the  Policy 
shall  be  a  sofflcient  notice 

This  Company  shall  not  be  liable  beyond  tho  actual  cash  value  of  the  property  at  the  time  any  loss  or  damag« 
Limitation  ot  lia-  occurs,  and  the  loss  or  damage  shallbe  ascertained  or  estimated  accordingly,  with  proper  deduction  for  deprecia^ 
''j"*"^'"'  ^^'>^  tion  however  caused,  (and  without  compensation  for  the  loss  of  use  of  the  property),  and  shall  in  no  event  exceed 
,._.  what  it  would  then  cost  to  repair  or  replace  the  Automobile  or  such  parts  thereof  as  may  be  damaged  with 

other  of  like  kind  and  quality;  euch  ascertainment  or  estimate  shall  be  made  by  the  Assured  and  this  Company, 
or  if  they  differ,  then  by  appraisal  as  hereinafter  provided 

It  shall  be  optional  with  this  Company  to  take  all  or  any  part  of  the  property  at  the  appraised  value  where 
AOanaonmeni.  appraisal  is  had  as  hereinafter. provided,  but  there  can  be  no  abandonment  thereof  to  this  Company;  and 
where  theft  is  insured  against  the  Company  shall  have  the  right  to  return  a  stolen  Automobile  or  other  property  with  compensatioo 
for  physical  damage,  at  any  time  before  actual  payment  hereunder. 

This  Company  shall  not  be  liable  for  loss  or  damage  to  any  property  insured  hereunder  while  in  the  possession 
Loss  for  Wnicfl  of  a  bailee  for  hire  under  a  contract,  stipulation  or  assignment  whereby  the  beneht  of  this  insurance  is  sought 
UMe  '^  ''*  ^^e  available  to  such  bailee.     Where  loss  or  damage  occurs  for  which  a  bailee  may  be  liable  and  which 

would  otherwise  be  covered  hereunder,  this  Company  will  advance  to  the  Assured  by  way  of  loan  the  money 
Equivalent  of  such  loss  or  damage,  which  loan  shall  in  no  circumstances  affect  the  question  of  the  Company's  liability  hereunder 
and  shall  be  repaid  to  the  extent  of  the  net  amount  collected  by  or  for  account  of  the.  Assured  from  the  bailee  after  deducting 
cost  and  expense  of  collection. 

Neon.  The  word  "Noon"  herein  means  noon  of  standard  time  at  the  place  the  contract  was  made. 

This  entire  Policy  shall  be  void  if  the  Assured  has  concealed  or  misrepresented  any  material  fact  Or  circumstance 
Misrepresentation  concerning  this  insurance  or  the  subject  thereof;  or  in  case  of  any  fraud,  attempted  fraud,  or  false  swearing  by 

the  Assured  touching  any  matter  relating  to  this  insurance  or  the  subject  thereof,  whether  before  or  after  a  loss. 

This  entire  Policy  shall  be  void  unless  otherwise  provided  by  agreement  in  writing  added  hereto; 

(a)  If  the  interest  of  the  Assured  in  the  subject  of  this  insurance  be  other  than  unconditional  and  sole  owner- 
Tliie  ana                 ship;  or  in  case  of  transfer  or  termination  of  the  interest  of  the  Assured  other  than  by  death  of  the  Assured  or 

in  case  of  any  change  in  the  nature  of  the  insurable  interest  of  the  Assured  in  the  property  described  herein 
either  by  sale  or  otherwise;  or 

(b)  If  this  Policy  or  any  part  thereof  shall  be  assigned  before  loss. 

Unless  otherwise  provided  by  agreement  in  writing  added  hereto,  this  Company  shall  not  be  liable  for  loss  Of 
ancOt        damage  to  any  property  insured  hereunder, 

(a)  While  encumbered  by  any  lien  or  mortgage. 

(b)  While  the  Automobile  described  herein  is  frequently  or  habitually  used  as  a  public  or  livery  conveyance 
um  lai  00  or  use*  ^^^  carrying  passengers  for  compensation,  and  for  one  week  after  the  termination  of  said  use;  or  while  being 
rented  nnder  contract  or  leased,  or  operated  in  any  race  or  speed  contest. 

In  the  event  of  loss  or  damage  occasioned  by  a  peril  insured  against  herein  the  Assured  shall  protect  the  property 
Prolection  OI  from  further  loss  or  damage  and  any  such  further  loss  or  damage  occurring  directly  or  indirectly  from  a  failure 

°  ■  to  protect  shall  not  be  recoverable  under  this  Policy.     Any  such  act  of  the  Assured  or  this  Company  or  its 

agents  in  recovering,  saving  and  preserving  the  property  described  herein,  shall  be  considered  as  done  for  the  benefit  of  all 
concerned  and  without  prejudice  to  the  rights  of  either  party,  and  aU  reasonable  expenses  thus  incurred  shall  constitute  a  claim 
under  this  Policy;  provided  however  that  this  Company  shall  not  be  responsible  for  the  payment  of  a  reward  offered  for  tho 
recovery  of  the  insured  property  unless  authorized  by  the  Company. 

In  the  event  of  loss  or  damage  the  Assured  shall  give  forthwith  notice  thereof  in  writing  to  this  Company;  and 
Notice  ano  praoi     within  sixty  (60)  days  after  such  loss,  unless  such  time  is  extended  in  writing  by  this  Company,  shall  render 
*  a  statement  to  this  Company  signed  and  sworn  to  by  the  Assured,  stating  the  place,  time  and  cause  of  the  loss 

or  damage,  the  interest  of  the  Assured  and  of  all  others  in  the  property,  the  sound  value  thereof  and  the  amount  of  loss  or  damage 
thereon,  all  encumbrances  thereon,  and  all  other  insurance  whether  valid  or  not  covering  said  property;  and  the  Assured,  as  often 
83  required,  shall  exhibit  to  any  person  designated  by  this  Company  all  that  remains  of  the  property  insured  and  submit  to 
examinations  under  oath  by  any  person  named  by  this  Company,  and  subscribe  the  same;  and  as  often  as  required,  shall  produce 
for  examination  all  books  of  account,  bills,  invoices,  and  other  vouchers,  or  certified  copies  thereof  if  originals  be  lost,  at  such 
reasonable  place  as  may  be  designated  by  this  Company  or  its  representative,  and  shall  permit  extracts  and  copies  thereof  to  be  made. 

In  case  the  Assured  and  this  Company  shall  fail  to  agree  as  to  the  amount  of  loss  or  damage,  each  shall,  on  the 
nppraisau  written  demand  of  either,  select  a  competent  and  disinterested  appraiser.    The  appraisers  shall  first  select  » 

competent  and  disinterested  umpire;  and  failing  for  fifteen  (16)  days  to  agree  upon  such  umpire  then,  on  request  of  the  Ass\ired 
cr  this  Company,  such  umpire  shall  be  selected  by  a  judge  of  a  court  of  record  in  the  County  and  State  in  which  the  property  insured 
was  located  at  time  of  loss.  The  appraisers  shall  then  appraise  the  loss  and  damage  stating  separately  sound  value  and  loss  or 
damage  to  each  item;  and  failing  to  agree,  shall  submit  their  differences  only,  to  the  umpire.  An  award  in  writing,  so  itemized, 
of  any  two  when  filed  with  this  Company  shall  determine  the  amount  of  sound  valuo  and  loss  or  damage.  Each  appraiser  shall 
be  paid  by  the  party  selecting  him  and  the  expenses  of  appraisal  and  umpire  ■shall  be  paid  by  the  parties  equally. 

This  Company  shall  not  be  held  to  have  waived  any  provision  or  condition  of  this  Policy  or  any  forfeiture  thereof 
raymeni  Ol  OSS.  ^^  ^^^  requirement,  act,  or  proceeding  on  its  part  relating  to  the  sppraisal,  or  to  any  examination  herein 
pK^vided  for;  and  the  loss  shall  in  no  event  become  payable  until  sixty  (60)  days  after  the  notice,  ascertainment,  estimate  and 
verified  proof  of  loss  herein  required  have  been  received  by  this  Company,  and  if  appraisal  is  demanded,  then,  not  untO  six^  (60) 
days  after  an  award  has  been  made  by  the  appraisers. 

This  Company  may  require  from  the  Assured  an  assignment  of  all  right  of  recovery  against  any  party  for  loss 
dUDTOBaiicn.  ^  damage  to  the  extent  that  payment  therefor  is  made  by  this  Company. 

.  _  Ko  suit  or  action  on  this  Policy  or  for  the  recovery  of  any  claim  hereunder  shall  be  sustainable  in  any  court  of 

^tagaintl  law  or  equity  unless  the  Assured  shall  have  fully  complied  with  all  the  foregoing  requirements,  nor  unless 

^*  cOBJHienced  within  twelve  (12)  months  next  after  the  happening  of  the  loss;  provided  that  where  such  limitation 


474    INSURANCE  PRINCIPLES  AND  PRACTICES 


CYl— Continued 


of  time  is  prohibited  by  the  laws  of  the  State  wherein  this  Policy  is  issued,  then  and  in  that  event  no  suit  or  action  tinder  this* 
Policy  shall  be  sustainable  unless  commenced  within  the  shortest  limitation  permitted  under  the  laws  of  such  State. 

This  Policy  is  made  and  accepted  subject  to  the  provisions,  exclusions,  conditions  and  warranties  set  forth  herein  or  endorsed 
liereon,  and  upon  acceptance  of  this  Policy  the  Assured  agrees  that  its  terms  embody  all  agrecnents  then  existing  between  himself 
and  the  Company  or  any  of  its  agents  relating  to  the  insurance  described  herein,  and  no  officer,  agent  or  other  representative  of 
this  Company  shall  have  power  to  waive  any  of  the  terms  of  this  Policy  unless  such  waiver  be  written  upon  or  attached  hereto; 
nor  shall  any  privilege  or  permission  affecting  the  insurance  under  this  Policy  exist  or  be  claimed  by  the  Assured  unless  so 
•written  or  attached. 

Provisions  required  by  law  to  be  stated  in  this  Policy. — This  Policy  is  in  a  stoc^  corpbratioa. 

3)n  13Iitn?B9  IBtjftTOf,  this  Company  has. executed  and  attested  these  presents;  but  this  Policy  ehall  not  be  valid  luiless 

countersigned  by  a  duly  authorized  ageut  of  the  Company  at 


Marine  Secretary 


Pfesmeri 


Countersigned  at„ 

This. jday  of- 


,19 


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APPENDIX  475 


CVII 

AUTOMOBILE    ENDORSEMENT 

VALUED  POLICY  CLAUSE 


Agency ,  iq2  . 


Valued  policy  and  In  consideration  of  the  increased  rate  at  which  this  Policy 
automatic  loss  re-  is  written  the  Automobile  described  herein  (body,  machinery 
instatement  and  equipment),  is  valued  at  the  sum  insured. 

In  the  event  of  loss  or  damage  to  said  Automobile  whether 
such  loss  or  damage  is  covered  by  this  Policy  or  not,  the  liability  of  this  Com- 
pany under  this  Policy  shall  be  reduced  by  the  amount  of  such  loss  or  damage 
until  repairs  have  been  completed,  but  shall  then  attach  for  the  full  amount  as 
originally  written,  without  additional  premium. 

All  other  terms  and  conditions  of  this  Policy  remaining  unchanged. 

Attached  to  and  forming  part  of  Policy  No ,  of  the 

INSUIL^NCE  COMPANY, 

Agent 


CVIII 

AUTOMOBILE    ENDORSEMENT 

LOCK  WARRANTY— PRIVATE  PLEASURE  TYPE  CARS 

Agency ,  192 . 


In  consideration  of  a  reduction  in  premium,  it  is  warranted  by  the  Assured 
that  the  Automobile  insured  under  this  Policy  will  be  continuously  equipped  with 

a  locking  device  known  as (approved  by  the  Underwriters* 

Laboratories,  Inc.,  and  bearing  their  label)   and  a  device  for  locking  spare  tires 

known  as (similarly  approved  and  labeled). 

The  Insured  undertakes  during  the  currency  of  this  Policy  to  use  all  diligence 
and  care  in  maintaining  the  efficiency  of  said  locking  devices  and  in  locking  the 
Automobile  and  spare  tires  when  leaving  the  same  unattended. 
All  other  terms  and  conditions  of  this  Policy  remaining  unchanged. 

Attached  to  and  forming  part  of  Policj'  No ,  of  the 

INSURANCE  COMPANY, 

Agent 


476    INSURANCE  PRINCIPLES  AND  PRACTICES 


cix 


AUTOMOBILE  SCHEDULES  FOR  FIRE,  COLLISION  AND  THEFT 

HAZARDS 

SECTION  I 

Schedule  for  Classification  as  to  the  Fire  Hazard: 

This  schedule  assumes  a  practicable  device  with  the  rainimurn  of  protection. 
To  provide  ample  range  and  to  employ  an  enlarged  scale  a  rating  of  8,000  points 
is  assigned  to  such  a  car.  When  improvements  as  outlined  by  the  individual 
items  of  the  schedule  are  found  incorporated  in  individual  makes  of  cars  sub- 
mitted for  classification,  credits  of  indicated  amounts  are  assigned,  resulting  in 
a  final  rating  for  each  such  individual  make,  type  or  model  of  car,  in  each  case 
less  than  8,000  and  of  a  definite  amount  designed  to  measure  the  extent  of 
hazard  as  compared  to  the  assumed  car  of  minimum  protection  or  maximum 
hazard. 

The  features  considered  are  built-in  or  integral  to  the  car  itself.  The  fire 
exposure,  the  moral  and  other  hazards  are  not  capable  of  analysis  in  this 
manner. 

To  each  group  of  hazards  is  assigned  a  percentage  of  the  total  of  8,000  points 
resulting  in  a  group  total  available  for  further  proportioning  among  the  sec- 
tions, sub-sections  and  items  comprising  each  group. 

The  object  of  this  schedule  is  to  provide  a  measure  of  the  relative  degrees  of 
fire  hazard  presented  by  the  integral  features  of  individual  makes  or  models 
of  cars.  To  this  end  the  schedule  provides  approximately  75  individual  items 
for  consideration.  Manufacturers  employing  features  in  their  design,  assembly 
or  equipment  practice  not  recognized  in  schedule  to  have  definite  protective  value 
should  submit  them  for  consideration  and  test  vyhen  recognition  will  be  given 
accordingly. 

The  word  "standard,"  as  employed  in  this  schedule  referring  to  devices  or 
methods  is  to  be  understood  as  signifying  that  the  Standards  of  the  Society  of 
Automotive  Engineers  apply.  The  word  "listed"  signifies  a  proprietary  device, 
material  or  method  which  has  been  examined  by  Underwriters'  Laboratories  and 
classified  as  suitable  for  the  specific  service  indicated. 

The  results  of  the  Underwriters'  Laboratories'  Application  of  the  schedule  to 
individual  makes  and  models  of  cars  will  be  reported  to  the  subraittors  thereof 
and  to  insurance  organizations.  Before  the  release  of  such  reports  they  will 
be  reviewed  by  the  Automobile  Council  of  Underwriters'  Laboratories.  Sub- 
mittors  who  desire  to  make  appeal  on  conclusions  reached  by  the  engineering 
staff  of  the  Laboratories  as  to  technical  matters  may  resort  to  the  Fire  Council 
or  if  preferred  to  committees,  if  any,  created  for  the  purpose  within  the  Society 
of  Automotive  Engineers.  In  either  case  the  findings  of  the  appeal  body  are 
to  be  accepted  both  by  the  submittor  and  the  Laboratories. 


APPENDIX  477 

CIX— Continued 

Group  1  of  the  Fire  Hazard  Schedule  (1,200  Points) 

Storage  of  Fuel   (gasolene)   including  Sections,  Capacity  of  Tank;  Location  of 
Tank;    Construction  of  Tank,  and  Tank  Mounting 

Capacity  of  Tank  (120  points) 

Points 
Item  No.  Description  of  Item  Credit 

1.  Capacity  more  than  30  gallons none 

2.  Capacity  over  25  gallons  and  not  over  30  gallons 15 

3.  Capacity  over  20  gallons  and  not  over  25  gallons 35 

4.  Capacity  over  10  gallons  and  not  over  20  gallons 70 

5.  Capacity  not  over  10  gallons none 

Total  credits  to  Tank  Capacity 120 

Location  of  Tank  (600  points) 

6.  Tank  located  in  cowl  and  filled  from  under  hood none 

7.  Tank  located  in  cowl  but  filled  without  opening  hood , .  30 

8.  Tank  located  under  front  or  rear  seat 120 

9.  Tank  located  at  rear  of  frame  and  not  enclosed  in  body 450 

(See  also  items  Nos  16  and  17) 

Total  credits  to  Tank  Location 600 

Construction  of  Tank  (240  points) 

10.  Tank  of  listed  construction  with  all  seams  and  fittings  of  substantial 

design  and  good  workmanship  including  all  provisions  of  items 

Nos.   1 1-14,   inclusive 240 

11.  Fill  opening  on  tank  of  size  to  accommodate  nozzle  of  service  station 

pump   (not  less  than  1.5  in  L  D.) 60 

12.  Fill  opening  on  tank  located  to  permit  convenient  use  and  to  avoid 

spilling  during  the  operation 50 

13.  Free  venting  of  tank  during  filling  operation  provided  for  in  a  listed 

manner    60 

14.  Provision  made  for  draining  tank  when  desired  without  removal 

from  mounting  25 

Total  credits  to  Tank  Construction 240 

Mounting  of  Tank  (24.0  points) 

15.  Tank   securely  mounted  to   prevent  its  becoming  loose  or   injured 

from  vibration  and  road  shocks,  according  to  method  employed..   0-145 

16.  At  rear  location,  and  standard  load  on  body,  no  part  of  tank  below 

road  clearance  of  rear  axle  housing  including  differential  hous- 
ing if  combined  with  rear  axle  housing 25 

17.  At  rear  location  tank  is  protected  from  injury  in  rear  end  collision         70 

Total  credits  to  Tank  Mounting 240 

Total  credits  to  Group  1  Fuel  Storage 1200 


478    INSURANCE  PRINCIPLES  AND  PRACTICES 

CIX — Continued 

Group  2  of  the  Fire  Hazard  Schedule  (1,200  Points) 
Fuel  Feed  System,  Gravity,  Pressure  or  Vacuum  Feed 

Points 

Item  No.  Description  of  Item  Credit 

18.  Gravity  Feed  System none 

19.  Pressure  Feed  System 120 

For  Vacuum  Feed  System  according  to  conditions  as  follows: 

(a)  When  vacuum  tank  has  capacity  of  1  quart  or  less: 

20.  Vacuum  tank  listed  construction 215 

21.  Vacuum  tank  placed  to  avoid  increase  of  hazard  when  fire  occurs. 

Usual  preferred  location  on  side  of  engine  block  opposite  car- 
buretor and  remote  from  any  sparking  device  and  from  exhaust 
piping.     According  to   degree 0-755 

(b)  When  vacuum  tank  has  capacity  of  more  than  1  quart: 

22.  Vacuum  tank  of  listed  construction 190 

23.  Vacuum  tank   location   as  detailed   in   item  No.  21.     According  to 

degree   0-570 

Total  points  for  vacuum  system 1080 

Total  points  for  Fuel  Feed  System 1200 


Group  3  of  the  Fire  Hazard  Schedule  (400  Points) 

The  Fuel  Line  and  Fittings:   Tank  to  Carburetor,  including  Sections,  Tubing 

and  Connectors;  Gauges;  Strainer  Fittings;  Shut-offs 

Tubing  and  Connectors  (200  points) 

24.  Tubing  of  annealed  metal  and  seamless 40 

25.  Tubing  of  ''non-corroding"  material  such  as  brass,  bronze  or  copper         10 

26.  When  items  24  and  25   apply  and  tubing  is  protected  in   a   listed 

manner  at  all  chafing  points 30 

27.  Feed  line  above  road  clearance  at  all  points 20 

28.  Feed  line  remote  from  or  protected  at  all  points  from  contact  with 

exhaust   piping  or   muffler 40 

29.  All  connector  fittings  are  standard  or  of  a  listed  pattern 60 

Total  points  to  Tubing  and  Connectors 200 


Gauges    {60  points) 

30.  A  gauge  or  indicator,  of  quantity  of  fuel  in  tank,  of  listed  pattern 

and  properly  installed 60 


Strainer  Fittings  (60  points) 

31.  Strainer  fittings  of  listed  pattern  installed  in  feed  line  between  tank 

and  carburetor   60 

(See  also  item  No.  38) 


APPENDIX  479 

CIX— Continued 

Shut-off  in  Feed  Line  (80  points) 

Points 
Item  No.  Description  of  Item  Credit 

To  shut-off  supply  of  fuel  from  storage  tank  to  carburetor: 

32.  Shut-off  valve  provided  when  vacuum  feed  is  used 10 

33.  Shut-off  valve  provided  when  pressure  feed  is  used IS 

34.  Shut-off  valve  provided  when  gravity  feed  is  used 25 

35.  Shut-oflt  valve  of  listed  pattern 10 

36.  With  pressure  or  gravity  feed  shut-off  valve  located  between  car- 

buretor  and   strained   fitting 10 

37.  With  either  feed  system  if  shut>.off  valve  is  operable  from  driving 

compartment    20 

Total  points  of  credit  to  Shut-off 80 


Total  points  to  Group  3 400 

Group  4  of  the  Fire  Hazard  Schedule  (400  Points) 
Carburetion 

38.  Carburetor  of  listed  make  or  pattern 200 

39.  Carburetor  located   remote  from  magneto  or  other  spark   or  flame 

emitting  device 60 

40.  Carburetor   provided   with   attachment   insuring   direct   draining  to 

ground  without  traps  or  similar  hazard  under  hood  of  carburetor 
overflow  or  flooding 140 

Total  points  to  Group  4,  Carburetion 400 


Group  5  of  the  Fire  Hazard  Schedule  (3200  Points) 

Electrical  Equipment: 

IFiring  (2400  points) 

Materials  (y^o  points) 

41.  High  tension  ignition  wires  provided  with  insulation  of  listed  qual- 

ity and  standard  thickness 75 

42.  All   low  tension  wiring  provided  with  insulation  of  listed   quality 

and  standard  thickness 400 

43.  All   low  tension  wiring  of  ample  copper  capacity  for  current  load 

(N.  E.  Code  Table,  Rule  18,  1918  Edition) 275 

750 

Installation 
Connections  (650  points) 

44.  All  splices  or  joints  in   wiring  made   and   finished   in   a   standard 

manner    325 

45.  All  terminal  connection  to  fittings,  etc.,  made  in  a  standard  manner 

or  with  listed  fittings 325 

650 


480    INSURANCE  PRINCIPLES  AND  PRACTICES 

CIX — Continued 

Supports    (350  points) 

Points 
Item  No.  Description  of  Item  Credit 

46.  All   wires   suitably   supported    at   frequent   points    so    as   to    avoid 

drooping,  chafing,  excess  vibration,  etc 175 

47.  Supporting  clamps  and  similar  fittings  such  as  bushings  to  be  stand- 

ard or  of  listed  makes  and  properly  secured 175 

350 

Protection  (650  points) 

48.  Wires  protected  from  mechanical  injury  in  a  standard  manner  or 

with   approved   fittings    200 

49.  Wires  located  to  avoid  damage  to  insulation  from  heat 200 

50.  Wires  protected   from  exposure   to   or  contact  with  oil,   grease  or 

gasolene   or  other  fuel 250 


650 


Devices   (600  points) 

51.  Switches  for  lighting,  ignition,  horn  and  starting  circuits  and  other 

switches,  if  any,  of  patterns  listed  for  the  specific  service  and 
properly  installed   125 

52.  Standard   fuses  in  proper  bases  or  other   automatic  overload   pro- 

tective devices  listed  for  the  specific  service  installed  in  all  low 
tension  circuits  except  the  ignition  and  starting  motor  circuit...       125 

53.  Ammeter  or  other  current  flow  indicator  of  listed  type  installed  in 

all    low   tension   circuits 150 

54.  Ignition  system  listed  and  properly  installed 100 

55.  Starting  and  lighting  system  listed  and  properly  installed 100 

600 

Circuits  (200  points) 

56.  All  low  tension  circuits  except  ignition  circuit  of  the  2-wire  insulated 

return  type   50 

57.  Provision  made  for  extension  lamp  circuit  assisting  car  inspection         100 

58.  Ignition  system  not  of  multiple  spark  plug  type 50 

200 

Group  6  of  the  Fire  Hazard  Schedule  (600  Points) 
exhaust  system  hazards 

Position 

59.  Exhaust  pipe  and  mufller  above  road  clearance  at  all  points.    Stand- 

ard load  on  body,  clearance  at  either  front  axle  fly  wheel  housing 
or  rear  axle  or  differential  housing  according  to  low  point  in  ex- 
haust  line    35 

60.  Exhaust  pipe  extends  past  rear  of  car  frame  and  body  including 

fuel  tank   30 

61.  Exhaust  pipe  has  at  least  1   inch  clearance  from  nearest  point  of 

fuel  tank,  measured  with  full  load  on  body 30 

62.  Exhaust  is  not  exposed  to  accumulations  of  grease  and  drippings  in 

mud  pan  or  elsewhere 270 


APPENDIX  481 

CIX — Continued 

Temperature  Rise  Tests 

Points 
Item  No.  Description  of  Item  Credit 

The  temperature  rise  tests  specified  below  for  items  Nos.  63  and  64 
will  be  made  in  a  closed  room  at  70  deg.  Fahrenheit  with  car 
standing  still,  spark  regularly  advanced  and  motor  running  at 
speed  equivalent  to  30  miles  per  hour.  Readings  to  be  taken  after 
1  hour  run,  thermometer  to  be  wired  in  place  with  bulbs  held  to 
surface  of  material  by  1  ounce  of  glazier's  putty. 

63.  Temperature  rise  not  exceeding  60  deg.  Fahrenheit  nearest  point  of 

tank  or  other  part  of  Fuel  Storage  or  Feed  system  to  exhaust 
or  muffler.  (Not  including  pre-heaters  at  air  intake  manifold 
of    carburetor)     30 

64.  Temperature   rise   not  exceeding   80   deg.   Fahrenheit.     Woodwork 

or   other   unprotected   combustible   material    exposed   to   exhaust 

pipe    of    muffler 30 

Muffler  Cutout 

65.  No  muffler  cutout  30 

66.  Muffler  cutout  used  but  not  operable  from  driving  compartment. ...         10 

67.  Discharge  of  muffler  cutout,  if  used,  or  of  exhaust  directed  away 

from  body  or  any  combustible  material 25 

Exhaust  Heater 

68.  Exhaust  heater  not  furnished 120 

69.  Exhaust  heating  system  of  listed  make  and  properly  installed  avoid- 

ing temperature  rise  in  surrounding  material  as  specified  in  item 

No.  64 .- 60 

Group  7  of  the  Fire  Hazard  Schedule  (1000  Points) 
Mud  Pan  (soo  points) 

70.  No  mud  pan 500 

71.  Vertical  side  pans  only 300 


•7 


Horizontal  side  plated  only 150 

73.  Sod  pan  not  extending  to  rear  beyond  fly  wheel  housing 75 

Gas  and  Oil  Lighting  (2$o  points) 

74.  No  gas  lights  used 125 

75.  No  oil  lights  used 125 

General  Workmanship  as  Indicated  by  Price  of  Product 

16.  Lisi  Price        $600.00 none 

77.  "         "          1,100.00 25 

78.  "         "          1,600.00 50 

79.  "         "          2,100.00 75 

80.  "         "          2,600.00 100 

81.  "         "          3,100.00 125 

82.  "         "          3,600.00 150 

83.  "         "         4,100.00 175 

84.  "         "          4,600.00 200 

85.  "         "          5,100.00 225 

86.  "         "         5,600.00  or  over 250 


482    INSURANCE  PRINCIPLES  AND  PRACTICES 

CIX — Continued 
SECTION  II 

Schedule  for  Classification  as  to  the  Collision  Hazard: 

This  section  considers  only  those  matters  affecting  damage  to  the  automobile 
under  consideration  and  which  are  integral  in  its  assembly.  Questions  of  in- 
jury to  persons  or  of  damage  to  other  property  are  not  pertinent. 

The  problem  of  protecting  an  automobile  from  damage  in  collision  with  other 
vehicles  or  with  fixed  objects  has  two  principal  phases,  the  first  of  which  is  posi- 
tive, tending  to  avoid  collisions.  The  second  phase  considers  minimization  of 
damage  when  collisions  occur.  This  schedule  treats  of  these  phases  separately 
and  in  addition  takes  account  of  items  classed  under  a  heading  Miscellaneous. 
As  in  the  Fire  Hazard  schedule  a  practicable  car  with  minimum  protection  is 
assumed  as  the  basis  for  classification,  a  total  of  5,000  points  is  distributed 
among  various  items  recognized.  Ample  range  in  classification  is  thereby 
secured  and  the  relative  importance  of  various  details  of  design,  assembly  or 
equipment  is  more  readily  indicated. 

The  general  procedure  in  applying  the  schedule  is  described  for  the  Fire 
Hazard  Schedule. 

Group  1  of  the  Collision  Hazard  Schedule  (3000  Points) 

Prevention  of  Collision  Damage 

The  items  under  this  phase  of  the  analysis  of  the  Collision  Hazard  may  be 
divided  into  four  sections  acording  to  the  following  headings: 

Braking  System;  Steering  System;  Visibility,  Lighting  and  Warning 

Equipment;  Road  Clearance 

Braking  System  (1500  points) 

Points 
Item  No.  Description  of  Item  Credit 

1.  Brake  lining  material  of  listed  type 375 

Area  of  Braking  Surface 

(a)  Service  brake: 

2.  Area  standard "" 

3.  Area  90  to  100%  of  standard 145 

4.  Area  75  to  90%  of  standard 90 

5.  Area  50  to  75%  of  standard 4^5 

6.  Area  less  than  50%  of  standard none 

(b)  Emergency  brake 

7.  Area  standard 120 

8.  Area  90  to  100%  of  standard 95 

9.  Area  75  to  90%  of  standard 60 

10.  Area  50  to  75%  of  standard 30 

11.  Area  less  than  50%  of  standard none 

Lugs  on  Pedals  or  Equivalent  Protection  Against  Foot  Slip  Combination  "A" 

12.  Clutch  pedal  protected 90 

13.  Service  brake  pedal  protected 135 


APPENDIX  483 

CIX— Continued 

Combination  "B" 

Points 
Item  No.  Description  of  Item  Credit 

14.  Combined  clutch  and  service  brake  pedal  protection 135 

15.  Emergency  brake  pedal  protection 90 


Brake  Linkage  Leverage 

(a)  Service  brake  leverage 

16.  Leverage  standard  180 

17.  Leverage  90-100%  of  standard 145 

18.  Leverage  75-90%  of  standard 90 

19.  Leverage  50-75%  of  standard 45 

20.  Leverage  less  than  50%  of  standard none 

(b)  Emergency  brake  leverage 

21.  Leverage  standard 120 

22.  Leverage  90-100%  of  standard 95 

23.  Leverage  75-90%  of  standard 60 

24.  Leverage  50-75%  of  standard 30 

25.  Leverage  less  than  50%  of  standard none 


Emergency  Hand  Brake  Location 

25.  Grip  of  emergency  hand  brake  not  forward  of  lovper  edge  of  dash 

when  brake  is  in  released  position 40 

27.  Grip  of  emergency  hand  brake  when  in  released  position  not  more 

than inches  from  low  point  of  steering  wheel  rim 80 

28.  Access  to  hand  brake  not  interfered  with  by  gear  shift  lever  or  other 

obstruction   30 

29.  For    adequate    means    of    preventing    lubrication    reaching    brake 

linings    75 

30.  For  two  independent  braking  systems 75 


The  Steering  System  (goo  points) 

31.  Steering  gear  of  listed  pattern 135 

32.  Steering  gear  provided  for  at  least  V/z  revolutions  of  steering  wheel 

between  left  and  right-hand  stop  position  of  the  front  wheels. ...  90 

33.  No  part  of  steering  gear  mechanism  lower  than  road  clearance  of 

front  axle   90 

34.  Castellated  nut  and  cotter  pin  or  other  method  of  positive   fasten- 
ing used   in   securing   all   essential   bolts,   sods,   etc.,   in   steering 

mechanism  135 

35.  Left-hand  drive    225 

36.  Standard  practice  of  front  wheel   steering 225 


484    INSURANCE  PRINCIPLES  AND  PRACTICES 

CIX— Continued 

Visibility,  Lighting  and  Warning  Equipment  (joo  points) 
Visibility,  as  employed  in  this  schedule,  has  to  do  with  the  ability  of  the 
driver  of  the  car  being  classified  to  see  the  road  and  objects  therein  by 
day  or  night. 

Points 
Item  No.  Description  of  Item  Credit 

37.  Headlight  lenses  of  listed  pattern  and  headlights  suitably  arranged 

with  regard  thereto 75 

38.  Equipment  included  windshield  cleaner  of  listed  pattern IS 

Lighting,  as  employed  in  this  schedule,  has  to  do  with  the  signalling  to 

drivers  of  other  vehicles  of  the  presence  on  the  road  of  the  car  being 
classified. 

39.  Rear  light  and  lens  equipment  of  listed  pattern 90 

40.  Light  in  driving  compartment  in  series  with  tail  light 15 

.  41.  Side  or  front  lights  below  level  of  top  of  rim  of  steering  wheel 45 

Warning,   signifies  means  of  signaling  to   following  traffic  intentions 
of  driver  with  regard  to  stopping  or  turning. 

42.  Equipment   included   warning   signal   of   listed   make   properly   in- 

stalled           60 

Road  Clearance  (joo  points) 

Road  clearance  to  be  measured  from  a  plane  surface  to  th:;  center  point 
front  axle  drop  oil  case,  fly  wheel  housing  or  differential  housing  on  rear 
axle.  Brake  drums  on  rear  wheels  and  steering  knuckle  connections  if 
not  outside  of  brake  drum  line  not  to  be  regarded. 

43.  Clearance  not  less  than  standard   (9  inches) 300 

44.  Clearance  not  more  than  8^  inches 225 

45.  Clearance  not  more  than  8  inches 150 

46.  Clearance  not  more  than  7J^  inches 30 

47.  Clearance  7  inches  or  less none 

Group  2  of  the  Collision  Hazard  Schedule  (1000  Points) 

Minimization  of  Damage: 

Fenders 

48.  Fender  crowns  of  one  piece 40 

49.  Front  fenders  not  projecting  beyond  tire  of  other  part  which  might 

protect  them  (not  including  bumpers  if  used) 100 

50.  Fenders   without   moulded   bowls   for   headlights   or   other   special 

shapes  60 

Radiator  Protection 

51.  Listed  radiator  guard  used  or  special  location  of  radiator  or  in  its 

absence 200 

Frame  Cross  Braces 

52.  Substantial    front  cross    frame   brace   built   in   within    6   inches   of 

spring  shackle    225 

53.  Substantial  rear  cross  frame  brace  or  equivalent  device  located  to 

protect  tank  or  body  or  other  light  parts 75 

Bumper  Equipment 

54.  Equipment  included  front  bumper  of  listed  make 225 

55.  Equipment  included  rear  bumper  of  listed  make 75 


APPENDIX  485 

CIX.— Continued 

Group  3  of  the  Collision  Hazard  Schedule  (1000  Points) 

Miscellaneous  or  General  Items 

Points 
Item  No.  Description  of  Item  Credit 

56.  Equipment  included  listed  self-starting  system 750 

Workmanship  and  Stability  as  Indicated  by  Price  of  Product 

57.  List  Price        $600.00 none 

58.  "  "  1,100.00 25 

59.  "  "  1,600.00 50 

60.  "  "  2,100.00 75 

61.  "  "  2,600.00 100 

62.  "  "  3,100.00 125 

63.  "  "  3,600.00 150 

64.  "  "  4,100.00 175 

65.  "  "  4,600.00 200 

66.  "  "  5,100.00 225 

67.  "  "  5,600.00  or  over 250 

SECTION  III 

Schedule  for  Classification  as  to  the  Theft  Hazard: 

Experience  to  date  indicates  that  the  chief  factor  influencing  the  theft  of  auto- 
mobiles is  the  readiness  with  which  they  may  be  disposed  of  and  put  to  subse- 
quent use  without  recognition  as  stolen  property.  In  other  words,  the  greater 
the  number  of  cars  in  service  of  a  given  model  and  design  the  more  attrac- 
tive an  individual  car  of  that  model  becomes  to  persons  contemplating  theft. 
To  some  extent  the  number  of  thefts  of  automobiles  is  regulated  by  the  density 
of  population.  These  and  other  considerations  prevent  detailed  analysis  of 
individual  makes  or  models  of  cars  as  to  physical  features  of  design  and  assem- 
bly for  the  purpose  of  classification  as  to  the  theft  hazard. 

Makers  of  automobiles  may  assist  in  some  measure  in  retarding  theft  and 
may  assist  in  the  reduction  of  insurance  losses  from  theft  by  providing  for  more 
ready  and  positive  identification  of  individual  units  of  production.  To  encour- 
age their  cooperation  in  these  directions,  automobiles  submitted  to  Underwriters' 
Laboratories  for  classification  as  to  the  Fire  and  Collision  hazards  under  the 
foregoing  schedules  will  be  classified  as  to  features  bearing  on  the  Theft 
Hazard,  as  follows: 

Theft  Retardants 
Built-in  or  Integral  Equipment  of  Listed  Locking  Device 

1.  Transmission  type.   Class   A 20% 

2.  Steering  wheel  type.  Class  B 17.5% 

3.  Combined  gasolene  and  ignition  type,  Class  C , 15% 

4.  Ignition  only  type.  Class  D 12.5% 

5.  For  stock  equipment  consisting  of  listed  spare  tire  lock  either  inte- 

gral or  accessory  in  addition  to  either  1  or  4  above 5% 

Identification 

6.  For  standard  marking  of  frame 7.5% 

7.  For  standard  marking  of  engine  block 7.5% 

8.  If  both  items  Nos.  6  and  7  apply 5% 

Deductions  according  to  the  foregoing  to  be  successive  in  the  order  of  above 

listing  as  they  apply.    Credits  for  one  item  only  Nos.  1  to  4,  inclusive. 


486     INSURANCE  PRINCIPLES  AND  PRACTICES 

SAMPLE  PAGE  OF  AUTOMOBILE  LIABILITY,  PROPERTY  DAMAGE 

AND  COLLISION  RATES 

LIABILITY  AND  PROPERTY  DAMAGE  RATES 

PRIVATE  PASSENGER  AUTOMOBILES 
(Gas  or  Steam) 

BASIC  COVERAGE 
(See  the  "Basic  Coverage"  Rule  in  the  Private  Passenger  Section) 


Terr. 

Symbol  W 

Symbol  X 

Symbol  Y 

Symbol  Z 

P.  L. 

P.  D. 

P.   L. 

P.  D. 

P.  L. 

P.  D. 

P.  L.       P.  D. 

1 

2 

3 

4 

5,  5A 

6 

7 

$100.00 
55.00 
47.00 
38.00 
28.50 
23.00 
17.00 
12.00 

$22.50 
15.50 
15.00 
13.00 
10.00 
10.00 
8.00 
6.00 

$119.00 
65.00 
56.00 
45.00 
34.00 
27.00 
20.00 
14.00 

$25.00 
17.50 
16.50 
14.50 
12.00 
12.00 
10.00 
7.00 

$144.00 
79.00 
68.00 
55.00 
41.00 
33.00 
25.00 
17.00 

$29.00 
20.00 
19.00 
16.50 
13.50 
13.50 
11.00 
8.00 

$176.00 
97.00 
82.00 
67.00 
50.00 
40.00 
30.00 
21.00 

$33.50 
23.00 
22.00 
19.50 
15.50 
15.50 
12.00 

8 

9.00 

COLLISION  RATES— PRIVATE  PASSENGER  AUTOMOBILES 

(Gas  or  Steam)     (Age  Group  1) 


Full  Coverage 

Collision 
Symbol 

Terr, 
land  2 

Terr. 
3  and  4 

Terr. 
5  and  6 

Terr. 

7 

Terr. 
8 

A 

$179 
205 
245 
274 
296 

395 

$163 
187 
222 
248 
269 

360 

$117 
139 
170 
186 
194 

238 

$62 
74 
90 
98 

104 

126 

$55 

B 

65 

C 

79 

D 

87 

E 

91 

U 

112 

$50  Deductible 


Collision 
Symbol 

Terr. 
1  and  2 

Terr. 
3  and  4 

Terr. 
5  and  6 

Terr. 

7 

Terr. 
8 

A 

$46 
56 
76 
91 

109 

237 

$42 
50 
67 
88 
99 

216 

$24 
29 
36 
44 
50 

108 

$18 
22 
30 
36 
43 

93 

$17 

B 

21 

c 

28 

D 

33 

E 

37 

U 

81 

$100  Deductible 

Collision 
Symbol 

Terr. 
1  and  2 

Terr. 

3  and  4 

Terr. 
5  and  6 

Terr. 

7 

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APPENDIX 


487 


CXI 
SAMPLE  PAGE  OF  AUTOMOBILE  FIRE  AND  THEFT  RATES 


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488    INSURANCE  PRINCIPLES  AND  PRACTICES 

CXII 

SAMPLE  AUTOMOBILE  CLASSIFICATION  SHEET 

Adv.  List  PD 

Tear         Model         H.P.  Type  of  Body  Price  F   T   C  PI. 

CIEBONIMO  Motor  Co^  Enid,  Okla. 

1918  4-A-40  (4)  37      Touring  895  E  T  D  W 
6A-45(6)  45        5-Ps.  Tour.                     1,395  E  T  F  X 

Road.  1,550  E  T  F  X 

Chummy  Rd.  1,550  B  T  F  X 

7-Ps.   Tour.  1,600  E  T  F  X 

1919  6  A-45(6)  45        Rd.,   5-Ps.  Tour.  1,550  B  T  F  X 

4-Ps.  Chummy   Rd.         1,550  E  T  F  X 
7-Ps.  Tour.  1,595  E  T  F  X 

1920  6-A-45  (6)  50      5-Ps.  Speedster  1,995  E  T  F  X 
6-G-45  (6)  50      Roadster  1,995  B  T  F  X 

*GHENT  .Motor  Co^  Chicago,  ID. 

1917  438(4)       38        5-Pass.Tour  990  E  T  EW 
*GHENT  Motor  Co.,  Ottawa,  IlL 

1918  660  (6)      55       Road.,  Tour.  1,875  E  T  G  X 

Sedan  2,500  E  P  J  X 

*G.  J.  G.  Motor  Car  Co.,  TYhlte  Plains,  N.  T. 

1912-15  All  models  ....EG   f   t 

♦GLEASON— Bauer  Machine  Works,  Kansas  City,  Mo. 

1913       All  models  . . . .  E  T  t  f 

•GLEASON— Kansas  City  Vehicle  Co.,  Kansas  City,  Mo. 

1912  AD  models 
•GLIDE— Bartholomew  Co.,  The,  Peoria,  DL 

1913-15  All  models 

1916  640  (6)      40       Touring 

Touruig 

1917  640  (6  cy)40       5-Ps.  Tr.,  4-P8.  Rd. 

Sedan 

1918  6-40  (6)    40        5-Ps.  Tr.,  4-Ps.  Rd. 

«IEANT  Motor  Car  Com  Cleveland,  Ohio. 

1913  AU  models 
«RANT  Motor  Car  Corp.,  Findlay,  Ohio. 

1913-16  All  models 
©RANT  Motor  Car  Corp.,  Cleveland,  Ohio. 

1917  K  (6)  34-36  3-Ps.  Rd.,  5-Ps.  Tr. 

5-Ps.  Tr.  Sedan 
3-Ps.  Cabriolet 
Sedan  Roadster 

1918  G  (6)         34-36  3-Ps.  Rd.,  5-Ps.  Tr. 

Detachable  Sedan 
All-Weather  Cpe. 
All-Weather  Sdn. 

1919  G  (6)  34-36  3-Ps.  Rd.,  5-Ps.  Tr. 

Detachable  Sedan 
All-Weather  Coupe 
All  weather  Sedan 

1920  G  (6)  35-40  3-Ps.  Rd.,  5-Ps.  Tr. 

Coupe,  Sedan 


....  B  T   t   t 

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1,095  B  T  F  X 

1,125  E  T  G  X 

1,295  E  T  G  X 

1,495  E  P  G  X 

1,655  B  T  G  X 

1,795  B  P  G  X 

....  ET   t   t 

....  E  T   t   t 

875  E  T  D  X 

1,050  E  Q  B  X 

1,100  B  T  F  X 

1,010  E  T  E  X 

1,245  E  T  D  X 

1,500  B  T  E  X 

1,725  E  Q  F  X 

1,745  E  Q  F  X 

1,120  E  T  D  X 

1,400  E  T  B  X 

1,625  E  Q  F  X 

1,645  B  Q  F  X 

1,595  B  T  E  X 

2,450  E  Q  H  X 

APPENDIX  489 

CXIII 


No 

CREDIT  INSURANCE  POLICY 

THE  INSURANCE  CO. 

(Hereinafter   called    the    Company)  . 


Oit  CoflMu^iUUOIV  of  the  representations  and  warranties  made  in  the  application  for  this  Policy,  or  any  prior 
Policy  of  Credit  Insurance  issued  to  the  Insured  by  this  Company,  which  are  hereby  made  a  part  of  this  Contract,  and 
upon  payment  of — Dollars  premium, 

cJu&WJOlf'BlUVUlfltc&*-  Tinder  the  conditions  and  subject  to  the  stipvdations  set  forth  on  the  wthin  pages, 

,  of . 

engaged  in  the  business  of -^ ,  against  loss  due  to 

insolvency  of  debtors,  as  hereinafter  defined,  which  shall  occur  within  a  term  beginning  the^ __day 

of 19 and  ending  the day  of_ — ^19 

and  result  from  the  Insured's  bona  fide  sales  of  merchandise  shipped  and  delivered  during -said  term  in  the  usual  course  of 
business  to  individuals,  firms,  co-partnerships  or  corporations,  in  the  United  States  of  America  or  any  Territory  thereofj 
and  in  the  Dominion  of  Canada;  and  which  is  covered,  proven  and  allowed,  as  is  hereinafter  stipulated.  From 
the  aggregate  net  loss,  ascertained  in  adjustment  as  hereinafter  provided,  there  shall  be  deducted  first,  ten  per  cent. 

<10%)  thereof  as  co-insurance,  and  from  the  remainder  an  agreed  Normal  Loss  of — — ^per  cent., 

to  be  borne  by  the  Insured,  upon  the  total  gross  sales  made  during  said  term;  but  such  Normal  Loss  so  to  be  deducted] 

shall  be  not  less  than  $ ;  and  the  remainder,  if  any,  after  said  deductions,  shall  be  the  loss  payable  byj 

the  Company. 

This  Policy  does  not  cover  any  loss  occurring  prior  to  the  payment  of  the  premium  thereon,  although  the 
Policy  may  have  been  delivered,  not  any  loss  occurring  after  its  expiration,  nor  any  loss  that  is  not  a  valid  indebtedness 
against  the  debtor. 

The  Conditions  and  Stipulations  on  the  within  pages  are  a  part  of  this  Contract. 

9nAl)itn^Av(MK!^eOf    the  <  has  caused  this 

Policy  to  be  signed  by  its  authorized  General  Manager  for  the  United  States  of  America,  acting  under  power  of  attorney  ."J 
but  the  same  shall  not  be  binding  upon  the  Company  unless  countersfgned  by  its  Assistant  General  Manager,  in  the  City 
of  this day  of 192 


COPY  OF  POLICY  APPLIED  FOR  IN  APPLICATION  ON  FOURTH  PAGE 


490    INSURANCE  PRINCIPLES  AND  PRACTICES 

CXlll— Continued 

Conditions  and  Stipulations. 

1 — COVERAGE — No  loss  is  covered  by  this  Policy,  unless  the  debtor  to  whom  thegoods  were  shipped  and  delivered  shall  have  in  the  latest 

published  book  of  the Mercantile  Agency,  at  the  date  of  the  shipment,  a  capital  rating  and  its  accompanying 

credit  rating,  as  tabulated  below. 

The  books  of  the  said  Mercantile  Agency  shall  respectively  govern  shipments  from  the  first  day  of  the  month  named  by  said  book 
to  the  first  day  of  the  month  named  -by  the  next  subsequent  book,  except  that  where  the  said  Mercantile  'Agency  increases  or  reduce  a 
rating  by  report,  compiled  during  the  currency  of  the  latest  published  book  or  within  thirty  (30)  days  prior  to  the  date  thereof,  shipments 
made  after  the  Insured  has  received  such  report  shall  be  governed  by  the  rating  in  such  report,  the  same  as  if  the  said  rating  had  ap- 
peared  in  the  latest  published  book. 

The  gross  amount  to  be  covered  on  any  one  debtor  at  the  date  of  insolvency  shall  be  limited  to  the  amouot  set  opposite  the 
correspoodiag  rating  of  the  debtor  in  the  subjoined  "Table  of  Ratings": 


The  aggregate  gross  amount  coverajl  on  the  accounts  of  any  one  debtor  shall  not  exceed  the  amount  owing  by  the  debtor,  nor 
exceed  the  limit  applicable  to  such  debtor  as  specified  above. 

The  total  amount  covered  on  the  indebtedness  of  a  debtor  having  more  than  one  governing  rating  shall  be  limited  to  the  amount 
set  opposite  the  debtor's  highest  governing  rating,  except  that  where  the  debtor's  highest  governing  rating  is  reduced,  shipments  made 
thereafter  shall  not  be  covered  so  long  as  the  debtor  owes  the  amount  set  opposite  the  reduced  governing  rating  in  the  "Table  of 
Ratings".  I  f,  however,  the  debtor  owes  less  than  the  said  amount,  the  total  amount  covered  on  all  governing  ratings  shall  not  exceed  the 
limit  set  opposite  the  said  reduced  rating. 

(NAMES  NOT  IN  BOOIO — A  shipment  to  a  debtor,  whose  name  does  not  appear  in  the  said  latest  published  book  at  the  date 
of  the  shipment,  shall  be  governed  by  the  rating  in  the  latest  report  of  said  Agency  on  such  debtor  compiled  within  four  months  prior 
to  the  shipment,  and  if  no  such  report  was  compiled  within  four  months  prior  to  the  shipment,  then  by  the  first  report  of  said  Agency 
on  such  debtor  compiled  wiihin  four  months  after  the  shipment.  Every  such  governing  rating  shall  have  the  same  effect  as  if  contained 
in  said  latest  published  book  at  the  time  of  shipment. 

1 — INSOLVENCY  DEFINED — For  the  purposes  of  this  Policy  a  debtor  shall  be  deemed  to  be  insolvent: 

(1)  When,  during  the  term  of  this  Policy,  the  Insured  elects  to  file  with  the  Company  for  collection,  an  account  that  is  due  and 
payable  at  the  time  of  filing,  but  not  over  sixty  (60)  days  past  due,  under  the  original  terms  of  sale; 

(2)  When  a  petition  in  bankruptcy  or  insolvency  is  filed  by  or  against  a  debtor  under  the  laws  of  the  United  States,  or  any  State 
or'Territory  thereof,  or  of  Canada; 

(3)  When  a  debtor  makes  an  offer  of  a  general  compromise  to  his  creditors  for  less  than  his  indebtedness; 

(4)  When  a  receiver  is  appointed  for  a  debtor; 

IS)     In  case  of  the  death  or  insanity  of  a  sole  debtor; 

(6)  In  case  of  the  recording  of  or  taking  possession  under  a  chattel  mortgage  given  by  a  debtor  on  his  stock  in  trade  to  a  creditor 
or  creditors; 

(7)  When  an  attachment  or  execution  is  levied  on  a  debtor's  stock  in  trade; 

(8)  When  a  writ  of  attachment  or  execution  against  a  debtor  is  returned  unsatisfied; 

(9)  When  a  debtor  transfers  or  sells  out  his  stock  in  trade  in  bulk; 

(10)  When  a  debtor  absconds; 

(11)  When  a  debtor  makes  an  assignment,  or  a  deed  of  trust,  for  the  benefit  of  his  creditors,  either  general  or  with  preferences; 

(12)  When  the  stock  in  trade  of  a  debtor  is  sold  under  a  writ  of  attachment  or  execution; 

(13)  When  a  confession  of  judgment  is  made  by  a  debtor; 

(14)  When  a  debtor's  business  is  assigned  to  or  taken  over  by  a  Committee  appointed  by  a  majority  in  number  and  amount  of 
bit  creditors; 

Provided  that  the  Insured  shall  take  no  action  in  respect  of  any  indebtedness  against  a  debtor,  insolvent  under  any  of  the  defini- 
tions of  insolvency  above  set  forth,  that  would  preclude  its  prompt  collection  by  the  Company  unless  the  Company's  consent  thereto 
in  writinf  is  first  obtained. 

«— NOTIFlCA'nON  OF  CLAIM, 

When  an  account  is  placed  withlthe  Company  for  collection  under  Subdivision  1  of  Condition  2  of  this  Policy,  the  Insured  shall 
file  with  it  a  Notification  of  Claim  on  the  form  prescribed  by  the  Company. 

Within  fifteen  (15)  days  after  acquiring  knowled^  of  a  debtor's  insolvency  under  Subdivisions  2  to  14,  inclusive,  of  Condition  2 
of  this  Policy,  the  Insured  shall  fi'e  Notification  of  Claim  and  forthwith  place  the  account  against  such  debtor  with  the  Company  for 
collection. 

All  accounts  for  collection  and  all  Notifications  of  Claim  shall  be  fU«d  with  the  Company  at 

The  Contpany  will  supply  the  blank  forms  for  filing  Notification  of  Claim. 

All  claims  filed  with  the  Company  under  this^Policy,  shall  be  handled  upon  the  Conditions  and  Stipulations  as  provided  in 
Condition  4  of  this  Policy. 

4— COLLECTION  OP  ACCOUNTS  AND  SCHEDULE  OF  FEES — ii:ach  Notification  of  Claim  filed  with  the  Company  in  accor<lance 
with  the  provisions  of  Condition  3  shall  be  accompanied  by  an  itemized  statement  of  the  account  showing  fully  the  true  condition 
thereof,  together  with  all  notes  or  other  papers  evidencing  the  same,  and  any  guarantees,  securities,  or  other  documents  relating  thereto; 
and  the  Insured  shall  upon  request,  promptly  furnish  duplicate  invoices,  proofs  of  debt,  affidavits,  or  any  other  documents,  or  any  infor- 
mation necessary  for  the  proper  handling  of  any  account  in  any  proceeding. 

Where  an  account  is  disputed,  in  whole  or  in  part,  or  where  the  Company  deems  it  necessary  to  enforce  collection,  or  to  enable 
the  Insured  to  participate  in  any  proceeding  involving  the  estate  of  the  debtor,  the  Insured  shall  authorize  suit  or  other  proceedings, 
and  shall  promptly  advance  the  necessary  costs. 


APPENDIX  491 

CXlll— Continued 

If  any  payment  or  return  of  merchandise  is  made  by  the  debtor  direct  to  the  Insured,  or  if  the  account  ij.withdrswn  by  llie 
loiured,  the  costs  and  fees  as  herein  provided  shall  be  paid  to  the  Company  by  the  Iniured,  the  same  as  if  collection  had  been  effected. 

The  receipt,  retention  or  the  handling  by  the  Company  of  any  account  filed  by  the  Insured  under  this  Policy  shall  not  constitute 
A  waiver  of  any  of  its  Conditions  or  Stipulations. 

The  Company  assumes  all  responsibility  for  moneys  collected  by  its  agents  and  correspondents  in  the  United£State«,  or  isy 
Territory  thereof,  and  Canada,  and  will  promptly  remit  all  amounts  due  to  the  Insured  as  collections  arc  made. 

Oa  each  account  filed  with  the  Company  under  Condition  3  of  this  Policy,  the  following  fees  shall  govern  on  collections  eSected : 

0)    Where  the  Company  effects  collection  witKout  placing  the  account  with  an  attorney} 

Seven  and  one-half  014%)  P"  cent-  of  the  6rst  Three  Hundred  ($300)  Dollars  or  less. 

Four  (4%)  per  cent,  on  the  next  Seven  Hundred  ($700)  Dollars. 

Two  (2%)  per  cent,  on  the  excess  over  One  Thousand  ($1,000)  Dollars. 

Minimum  fee  Two  Dollars  and  Fifty  Cents  ($2.50). 

(2)    Where  the  Company  deems  it  necessary  to  secure  the  services  of  an  attomeyi 

Fifteen  (15%)  per  cent,  of  the  first  Three  Hundred  ($300)  Dollars  or  less. 
Eight  (8%)  per  cent,  on  the  next  Seven  Hundred  ($700)  Dollars. 
Four  (4%)  per  cent,  on  the  excess  over  One  Thousand  ($1,000)  Dollars. 
Minimum  fee  Five  ($5)  Dollars. 

Claims  under  Ten  ($10)  Dollars,  fee  50%.  ^  .  .     ,         .        .    .  j  .-,      ,,,-» 

Minimum  suit  lee  Seven  Dollars  and  Fifty  Cents  ($7.50)  in  addition  to  the  lees,  the  whole  not  to  exceed  Fifty  (50%)  ptt  ceot.. 
of  the  claim. 

In  localities  where  collection  fees  or  rates  are  established  by  law  or  by  bar  rules,  such  law  or  bar  rules  shall  govern,  or  if  the  Com- 
oiercial  Law  League  o(  America  shall  adopt  a  higher  or  lower  schedule  of  fees  than  hereinabove  set  forth,  in  schedule.(2).  such  revised 
schedule  so  adopted,  shall  govern  on  all  claims  filed  with  the  Company  thereafter. 

When  litigation  or  unusual  proceedings  are  authorized  by  the  Insured,  a  reasonable  attorney's  fee, -in  addition  to  the  regular  coUec> 
tioB  fee,  will  be  charged. 

S— FINAL  STATEMENT  OF  CLAIM— If  any  claim  for  excess  Io6s  is  made  under  this  Policy,  a  Final  Statement  of  Claim,  duly  sworn 
to  shall  be  made  by  the  Insured  upon  blank  forms  which  will  be  furnished  by  this  Company  upon  application,  and  such  Final  State- 
ment must  be  received  b;'  this  Company  at  its  office  in  -  within  thirty  (30)  days  after  the  expiration  of  tnis  Policy; 
otherwise  there  shall  be  no  liability  upon  the  part  of  the  Company  under  this  Policy. 

The  adjustment  shall  be'  had  within  forty-five  (45)  days  after  the  receipt  by  this  Company  of  such  Final  Sut»nea^  and  the 
amount,  if  any,  then  ascertained  to  be  due  on  covered  proved  losses  shall  at  once  become  payable. 

*— METHOD  OP  ADJUSTMENT— To  ascertain  the  net  loss  in  any  adjuetment  under  this  Policy,  there  shall  be  deducted  from  each 

gross  loss  covered  and  proven  under  this  Policy: 

(1)    All  discounts  tp  which  the  debtor  would  have  been  entitled  had  the  debt  been  paid  at  the  date  of  insolvency: 
(2).   All  amounts  collected  thereon  and  all  amounts  which  may  have  been  obuined  from  any  other  source; 

(3)  The  amount  of  goods  returned  or  replevined,  when  such  goods  are  in  the  undisputed  possession  of  the  Insured: 

(4)  All  amounts  mutually  agreed  upon  as  thereafter  obuinable. 

If  no  mutually  satisfactory  agreement  should  be  reached,  as  to  the  amounts  thereafter  obtainable  on  any  loss,  this  Company  shall 
allow  the  unpaid  part  of  such  loss,  so  far  as  covered.  The  Insured  shall  assign  to  this  Company  all  accounts  admitted  in  adjust- 
ment, together  with  all  securities  and  guarantees  relating  thereto,  except  those  accounts  upon  which  the  amount  thereafter  obtainablo 
is  mutually  agreed  upon.  Such  assigned  accounts  shall  be  handled  by  the  Company  for  the  joint  account  of  the  insured  and  the  Cpm» 
paoy  as  their  interests  may  appear. 

If  the  indebtedness  of  the  debtor  to  the  Insured  at  the  time  of  the  insolvency  is  not  covered  in  full  by  this  Policy,  then  said  dedu» 
tlons  shall  be  made  pro-rata,  vij:  in  the  ratio  which  the  amount  covered  bears  to  the  whole  of  suci  indebtedness. 

From  the  aggregate  amount  of  the  net  covered  and  proven  losses  thus  ascertained,  there  shall  be  deducted,  (first),  ten  per  eeiit. 
(10%)  thereof,  as  co-insurance:  (second),  the  agreed  Normal  Loss,  and  the  balance,  if  any,  shall  be  the  amount  due  the  Insured.  »' the 
net  amounts  realized  by  the  Company  on  the  claims  assigned  to  it,  as  above  provided,  ohall  in  the  aggregate  exceed  the  sum  paid  ta 
the  Insured,  the  Company  shall  refund  the  net  excess. 

7— COLLATERAL  BENfeFlTS— This  Policy  Is  not  negotiable  but  the  Company  will,  upon  written  request  of  the  Insur^,  -prtwide  thai 
any  excess  loss,  that  may  become  due  and  payable  under  its  Conditions  and  Stipulau'ons,  shall  be  paid  to  any  Bank  or  Trust  Company 
designated  by,  and  for  account  of  the  Insured. 

8— TERMINATION— If,"  during  the  term  of  this  Policy,  the  Insured  shall  be-,,-ne  insolvent,  or  shall  cease  to  continiie  business  as 
heretofore  carried  on,  or  shall  go  into  liquidation,  or  being  a  partnership  shall  l>e  dissolved,  then  this  Policy  shall  im-nediately  terminate  and 
if  any  claim  for  excess  loss  is  made,  a  Final  Sutcment  of  Claim  shall  be  filed  by,  and  an  adjustment  shall  be'made  with,  the  Insured 
in  the  same  time  and  manner  as  il  this  Policy  had  originally  by  its  terms  been  made  to  expire  at  the  date  of  such  termiiiation. 
Temporary  Interruption  by  fire  or  by  strike,  or  the  death  or  withdrawal  or  admission  of  a  member  of  a  partnership  composed  of  more 
than  two  members,  shall  not  be  considered  a  discontinuance  or  dissolution. 

9— GENERAL  PROVISIONS— The  premium  on  this  Policy  shall  be  paid  by  check  to  the  order  of  the 
Company 

This  Company  will  acknowledge  the  receipt  of  all  Notifications  of  Claim  and  the  Final  Statement  of  Claim,  but  neither  the 
acknowledgment  nor  the  retention  thereof  by  this  Company,  nor  its  failure  to  acknowledge  receipt,  shall  be  deemed  an  admission  of 
liability  or  a  waiver  of  any  of  the  provr.ions  of  this  Policy  by  this  Company. 

The  representations  and  warranties  made  in  the  application  ol  the  Insured  arc  the  basis  of,  and  a  part  of,  this  Policy.  Misrep- 
resentation, concealment  "or  fraud  in  obtaining  this  Policy  or  any  Policy  of  Credit  Insurance  heretofore  issued  by  this  Company  to  the 
Insured,  or  In  the  proof  or  adjustment  ol  any  claim  for  ]ms  under  this  Policy,  shall  void  this  Policy  from  its  beginning  and  the  premium 
paid  shall  be  forfeited.  The  Insured  shall  permit  this  Company  to  examine  and  t.ikc  extracts  Irom  the  books,  securities  and  papers. 
of  the  Insured  bearing  upon  any  matter  involved  in  .iny  adjustment  under  this  Policy,  or  upon  any  representation  or  warranty  made  in 
the  application  for  this  Policy  or  any  prior  Policy  of  Credit  Insurance  issued  by  this  Company  to  the  Insured,  or  upon  any  claim  made 
either  by  the  Insured  or  by  this  Company  under  this  Policy. 

No  Agent  is  authorized  to  make  any  alteration  in,  or  addition  to,  this  Policy:  and  no  addition  to,  or  alteration  of,  this  Policy 
eball  be  valid  unless  signed  by  the  General  Manager  of  the  Company  for  the  United  States. 

All  provisions  of  this  Policy  arc  to  be  deemed  conditions  precedent  to  any  claim  by  the  Insured. 

No  suit  or  action  on  this  Policy  shall  be  brought  or  be  sustainable  until  after  compliance  by  the  Insured  with  the  terms  of  this 
Policy,  nor,  in  the  abseoce  ol  any  statutory  provision  to  the  contrary,  unless  commenced  within  twelve  months  after  its  expiration. 


492    INSURANCE  PRINCIPLES  AND  PRACTICES 

CXIII— Continued 

Application. 

We,  the  undersigned, hereby  make  application  to  the 

for  a  Policy  of  Credit  Insurance;  said  Policy,  if  issued,  to  be  on  the  withlr>  form,  the  terms,  conditions  and 

stipulations  whereof  are  agreed  to  by  us.     We  herewith  tender  our  check  for  $ to  the  order  of  said 

Company  in  payment  of  the  premium  on  said  Policy. 

We  agree  that  the  ratings  of  the Mercantile  Agency  shall  govern  exclusively  shipments 

under  this  Policy:     We  have  been  subscribers  to  said  Mercantile  Agency  during  the  past years. 

Our  answers  to  the  following  questions  are  true: 

1.  What  is  your  line  of  business? How  long  in  it? years. 

2.  Are  you  Jobbers  or  Manufacturers? . 

3.  What  territory  do  you  cover? -. , 

4.  To  what  territory  do  you  make  your  principal  shipments? 


5.  What  are  your  usual  terms  of  sale? What  are  your  longest  terms  of  sale? 

6.  About  what  percentage  of  sales  to  Manufacturers? Jobbers? Retailers?- 


7.     Have  you  any  information  detrimental  to  the  credit  or  responsibility  of  any  individual,  firm,  co-partnership 
or  corporation  to  whom  you  have  made,  or  contemplate  making,  any  sale  to  which  said  Policy^  if  issued,  will  apply? 


8.  Have  you  within  the  past  year  made,  or  do  you  contemplate  making,  any  material  change  in  the  manner 
of  conducting  your  business,  terms  of  sale  or  territory  mentioned  above? . . — — — 

As  a  basis  of  the  Policy  hereby  applied  for,  and  of  any  Policy  which  may  hereafter  be  issued  to  us,  we  warrant 
the  following  statement  of  our  gross  sales,  losses,  and  amounts  of  accounts  owing  by  debtors  under  general  extension* 
to  be  correct: 

TFRM  CROS«^   SAF  F*:;  all  LOSSBS  (after  deducUna      AMOUNTS  OP  ACCOUNTS 

^      .  ,       f,    "^'JL      ,.  V>K.<JOO   3rtUEO  only  actual  cjMh  recovertea  owln4  by  Debtor.  Under 

During  the  Year  Endmg:  rromdebtoretodate).  Ceoeral  Eicenalon. 


_19 $ $. 

_19 $ $. 

-19 $ $. 

-.19 $ $- 

-19 $ $. 

_19 $ .  $- 

_19 $ $- 


During  the  Fractional  Year  to  Date.  $ $ $ 

This  application  and  said  Policy,  if  issued,  shall,  with  the  within  Conditions  and  Stipulations,  constitute  the 
entire  agreement  between  the  undersigned  and  the  J  any  verbal  or  wrrtten 

statement,  promise  or  agreement,  by  any  Agent  of  the  said  Company  to  the  contrary  notwithstanding.  It  is  also 
agreed  that  this  application,  whether  as  respects  anything  contained  therein  or  omitted  therefrom,  has  been  iiiade» 
prepared  and  written  by  the  applicant,  or  by  his  own  proper  agent. 

Dated  at_ this day  of — 19 — - 

Signature  of  applicant — 


Address- 


.192.,-* 


Received  of  the 


-Dollars, 


in  full  and  complete  satisfaction  of  all  claims  and  demands  of  whatsoever  kind  or  nature  under  the  within 
Policy  of  Credit  Insurance,  and hereby  release,  and  forever  discharge  the  said  Com- 
pany from  any  and  all  liability  thereunder. 


APPENDIX  493 

CXIV 
CREDIT  INSURANCE  POLICY 

No 


(Hereinafter  celled   the  Coinpany% 


tKt  Cofldld^WKori/  of  the  representations  and  warranties  made  in  the  application  for  this  Policy,  or  any  prior 
Policy  of  Credit  Insurance  issued  to  the  Insured  by  this  Company,  and  which  are  hereby  made  a  part  of  this  Contract.' 
and  of  the  payment  of  the  premium  as  hereinafter  provided, 

^C&l0Oy^y\XXX/iaX\Xeed'  under  the  conditions  and  subject  to  the  stipulations  set  forth  on  the  within  pages. 

-of . 

engaged  in  the  business  of - •  against  loss,  due  to  the 

insolvency  of  debtors  as  hereinafter  defined,  which  loss  shall  result  from  the  Insured's  bona  fide  sales  of  merchandise 

shipped  and  delivered  during  tl}e  Policy  period,  beginning  the day  of 

19 ,  and  ending  the day  of 19 •  to  individuals,  firms,  co-part- 

nerslupe  or  corporations,  in  the  United  States  of  America,  or  any  Territory  the-eof,  and  in  the  Dominion  of  Canada; 
and  which  is  covered,  proven  and  allowed,  as  is  herdnafter  stipulated;  provided  the  accounts  have  been  placed  with 
the  Company  for  collection  before  they  are  more  than  seventy-five  (75)  das^s  past  due  under  the  original  terms  of  sale 

and  provided  further  that  no  accotmt  filed  with  the  Company  after  the day  of 19 , 

shall  be  covered  by  this  Policy.  From  the  aggregate  gross  loss  so  covered,  proven  and  allowed,  there  shall  be  deducted, 
first,  ten  ■pet  cent.  (10%)  thereof  as  co-insurance,  and  then  the  other  amounts  hereinafter  provided  in  the  method  of 

adjustment,  and  from  the  aggregate  net  loss  thus  ascertained  an  agreed  Normal  Loss  of per  cent.,  to  be  borne  by 

the  Insured,  upon  the  total  gross  sales  made  during  said  Policy  period ;  but  such  Normal  Loss  so  to  be  deducted  shall  be 
not  less  than  % ,  and  the  remainder,  if  any,  after  said  deductions,  shall  be  the  loss  payable  by  the  Company. 

This  Policy  does  not  cover  any  loss  occurring  prior  to  the  payment  of  the  minimtmi  premium  thereon,  although 
the  Policy  may  have  been  delivered,  nor  any  loss  that  is  not  a  valid  indebtedness  against  the  debtor. 

The  Conditions  and  Stipulations  on  the  within  pages  are  a  part  of  this  Contract. 

3fvCOitn<2JkKlilKlTa>f  the  .bas  caused  this 

Policy  to  be  signed  by  its  authorized  General  Manager  for  the  United  States  of  America,  acting  under  power  of  attorney, 
but  the  same  shall  not  be  binding  upon  the  Company  unless  countersigned  by  its  Assistant  General  Manager  in  thc^ 
City  of  tiiis day  of 192 . 


COPY  OF  POLICY  APPLIED  FOR  IN  APPLICATION  ON  FOURTH  PAGE 


494    INSURANCE  PRINCIPLES  AND  PRACTICES 

CXIV— Continued 
Conditions  and  Stipulations 

1 — PREMIUM — ^The  earned  premium  fnr  the  full  Policy  period  shall  be per  cent  of  the  total  gross  shipments  and  deliveries  made 

by  the  Insured  during  said  period,  but  shall  not  be  less  than ($ )  Dollars,  minimum,  which  shall 

be  payable  to  the  Company  when  application  is  rtiade  for  this  Policy,  and  the  remainder  of  the  earned  premium,  if  any,  shall  be  paid  immediately  upoa 
ascertainment  of  the  amount,  and  the  Insured  shall,  when  requested,  furnish  the  Company  with  the  amount  of  the  aforesaid  shipments  and  deliveries, 

J— COVERAGE — No  loss  is  covered  by  this  Policy  unless  the  debtor  to  whom  the  goods  were  shipped  and  delivered  shall  have  in  the  latest  published 

book  of  the Mercantile  Agency,  at  the  date  of  the  shipment,  a  capital  rating  and  its  accompanying  credit  rating,  as 

tabulated  below. 

The  books  of  the  said  Mercantile  Agency  shall  respectively  govern  shipments  from  the  first  day  of  the  month  named  by  said  book  to  the  first  day 
of  the  month  nam'ed  by  the  next  subsequent  book,  except  that  where  the  said  Mercantile  Agency  increases  or  reduces  a  rating  by  report,  compfte4 
during  the  currency  of  the  latest  published  book  or  within  thirty  (30)  days  prior  to  the  date  thereof,  shipments  made  ?*»er  the  Insured  has  received 
such  report  shall  be  governed  by  the  rating  in  such  report,  the  same  as  if  the  said  rating  had  appeared  in  the  latest  published  book. 

The  gross  amount  to  be  covered  on  any  one  debtor  at  the  date  of  insolvency  shall  be  limited  to  the  amount  set  opposite  the  corresponding 
lating  of  the  debtor  in  the  subjoined  "Table  of  Ratings:" 


The  aggregate  gross  amcunt  covered  on  the  acccnnts  of  any  one  debtor  shall  not  exceed  the  imount  owing  by  the  debtor,  nor  exceed  the  limit 
applicable  to  such  debtor  as  specified  above. 

The  total  amount  covered  on  the  indebtedness  of  a  debtor  having~ffiS?e  thanDne  governing  rating  shall  be  limited  to  the  amount  set  opposite  the 
debtor's  highest  governing  rating,  except  that  where  the  debtor's  highest  gpveming  rating  is  reduced,  shipments  made  thereafter  shall  not  be  covered  s* 
kjiig  as  the  debtor  owes  the  amount  set  opposite  the  reduced  governing  rating  in  the  "Table  of  Ratings^'  If,  however,  the  debtor  owes  less  than  the  said 
amount,  the  total  amount  covered  on  all  governing  ratings  shall  not  exceed  the  limit  set  opposite  the  said  reduced  rating. 

(NAMES  NOT  IN  BOOK) — A  shipment  toa  debtor,  whose  name  does  not  appear  in  the  said  latest  published  book  at  the  date  of  the  shipment, 
ehall  be  governed  by  the  rating  in  the  latest  report -of  said  Agency  on  such  debtor  compiled  within  four  months  prior  to  the  shipment,  and  if  no  such 
report  was  compiled  within  four  months  prior  to  the  shipment,  then  by  the  first  report  of  said  Agency  on  such  debtor  compiled  within  four  months 
after  the  shipment.    Every  such  governing  rating  shall  have  the  same  effect  as  if  contained  in  said  latest  published  book  at  the  time  of  shipment. 

3 — INSOLVENCY  DEFINED — For  the  purpose  of  this  Policy  a  debtor  shall  be  deemed  to  be  insolvent: 

(1)  When  the  Insured  files  with  the  Company  for  collection,  an  account  that  is  due  and  payable  at  the  time  of  filing,  but  not  over  serent;^ 
frre  (75)  days  past  due,  under  the  original  terms  of  sale; 

(2)  When  a  petition  in  bankruptcy  or  insolvency  is  filed  by  or  against  a  debtor  under  the  laws  of  the  United  States,  or  any  State  or  T«f» 
ritory  thereof ,  or  of  Canada ; 

(3)  When  a  debtor  makes  an  offer  of  a  general  compromise  to  his  creditors  for  less  than  his  indebtedness; 

(4)  When  a  receiver  is  appointed  for  a  debtor: 

(5)  In  case  of  the  death  or  insanity  of  a  sole  debtor; 

(6)  In  case  of  the  recording  of  or  taking  possession  under  a  chattel  mortgage  given  by  a  debtor  on  his  stock  in  trade  to  a  creditor  or  creditors; 
<7)     When  an  attachment  or  execution  is  levied  on  a  debtor's  stock  in  trade; 

(8)  When  a  writ  of  attachment  or  execution  against  a  debtor  is  returned  unsatisfied; 

(9)  When  a  debtor  transfers  or  sells  out  his  stock  in  trade  in  bulk; 


(10)     When  a  debtor  absconds; 
(11) 


When  a  debtor  makes  an  assignment,  or  a  deed  of  trust,  for  the  benefit  of  his  creditors,  either  general  or  with  preferences; 

(12)  When  the  stock  in  trade  of  a  debtor  issold  under  a  writ  of  attachment  or  execution; 

(13)  When  a  confession  of  judgment  is  made  by  a  debtor; 

(14)  When  a  debtor's  business  is  assigned  to  or  taken  over  by  a  Committee  appointed  by  a  majority  in  number  and  amount  of  his  creditora; 

Provided  that  the  Insured  shall  take  no  action  in  respect  of  any  indebtedness  against  a  debtor,  insolvent  under  any  of  the  lilefinitions  of  insolvency 
above  set  forth,  that  would  preclude  its  prompt  collection  by  the  Company  unless  the  Company's  consent  thereto  in  writi»g  is  first  obtained. 

4 — NOTIFICATION  OF  CLAIM — When  an  account  is  placed  with  the  Company  for  collection  under  Subdivision  1  of  Condition  3  of  this  Policy,  tbe 
Insured  shall  file  with  it  a  Notification  of  Claim,  on  the  form  prescribed  by  the  Company. 

Within  fifteen  (15)  days  after  acquiring  knowledge  of  a  debtor's  insolvency  under  Subdivisions  2  to  14,  inclusive,  of  Condition  3  of  this  Policy,  Jtbt 
Insured  shall  file  Notification  of  Claim  and  forthwith  place  the  account  against  such  debtor  with  the  Company  for  collection. 


An  accounts  for  collection  and  all  Notifications  of  Cliim  shall  be  filed  with  the  Company  at  ,    ■ 

The  Company  will  supply  the  blank  foims  for  filing  Notifications  of  Claim. 

All  claims  filed  with  the  Company  under  this  Policy,  shall  be  handled  upon  the  Conditions  and  Stipulations  as  provided  in  Condition  S  of  this 
Policy. 

5 — COLLECTION  OF  ACCOUNTS  AND  SCHEDULE  OF  FEES — Each  Notification  of  Claim  filed  with  the  Compart^  in  accordance  with  the  pro- 
visions of  Condition  4  shall  be  accompanied  by  an  itemized  statement  of  the  account  showing  fully  the  true  condition  thereof,  together  with  all  notes 
or  other  papers  evidencing  the  same,  and  any  guarantees,  securities,  or  other  documents  relating  thereto;  and  the  Insured  shall  upon  request,  promptly 
furnish  duplicate  invoices,  proofs  of  debt,  affidavits,  or  any  other  documents,  or  any  information  necessary  for  the  proper  handling  of  any  account  in  any 
proceeding. 

Where  an  account  is  disputed,  in  whole  or  in  part,  or  where  the  Company  deems  it  necessary  to  enforce  collection,  or  to  enable  the  Insured  to 
participate  in  any  proceeding  involving  the  estate  of  the  debtor,  the  Insured  shall  authorize  suit  or  other  proceedings,  and  shall  promptly  advance  the 
necessary  costs. 

If  any  payment  or  return  of  merchandise  is  made  by  the  debtor  direct  to  the  Insured,  or  if  the  account  is  withdrawn  by  the  Insured,  the 
costs  and  fees  as  herein  provided  shall  be  paid  to  the  Company  by  the  Insured,  the  same  as  if  collection  had  been  effected. 

The  receipt,  retention  or  the  handling  by  the  Company  of  any  account  filed  by  the  Insured  under  this  Policy  shall  not  constitute  a  waiver  of  any 
of  its  Conditions  and  Stipulations. 

The  Company  assumes  all  responsibility  for  moneys  collected  by  its  agents  and  correspondents  in  the  United  States,  or  any  Territory  t]iereaf» 
and  Canada,  and  will  promptly  remit  all  amounts  due  the  Insured  as  collections  are  made. 


APPENDIX  495 

CXIY— Continued 

On  each  acconnt  6ted  vith  the  Company  under  Condition  4  of  this  Policy,  the  following  fees  shall  govern  on  collections  effected : 

O)     When  the  Company  effects  collection  without  placing  the  account  with  an  attorney: 

Seven  and  one-half  (7)^%)  P«'  cent  o(  the  first  Three  Hundred  ($300  00)  Dollars  or  lea*. 

Four  (4%)  per  cent,  on  the  next  Seven  Hundred  ($700  00)  Dollars 

Two  (2%)  per  cent,  on  the  excess  over  One  Thousand  ($1,000  00)  Dollars. 

Minimum  lee  Two  Dollars  and  Fifty  Cents  ($2.50.) 

(3)    Where  the  Company  deems  it  necessary  to  secure  the  services  of  an  ottomey* 

Fifteen  (15%)  per  cent  o(  the  first  Three  Hundred  ($J00  00)  Dollars  or  less. 

EiRht  (8%)  per  cent  on  the  next  S<ven  Hundred  ($700  00)  DolLirs. 

Four  (4%)  per  cent,  on  the  excess  over  One  Thousand  ($1,000.00)  Dollars. 

Minimum  lee  Five  ($5  00)  Dollars 

Claims  under  Ten  ($10.00)  Dollars,  (ee  Fifty  (50%)  per  cent 

Minimum  suit  fee  Seven  Dollars  and  Fifty  Cents  ($7.50)  in  addition  to  the  fees,  the  whole  not  to  exceed  Fifty  (50%)  per  cent  of  the  claim. 

In  localities  where  collection  fees  or  rates  are  established  by  law  or  by  bar  rules,  such  law  or  bar  rules  shall  govern,  or  it  the  CommerciaV 
Law  League  ol  America  shall  adopt  a  higher  or  lower  schedule  of  fees  than  hereinabove  set  forth,  in  Schedule  (2),  such  revised  schedule  so  adopted,  shall 
govern  on  all  claims  filed  with  the  Company  thereafter. 

When  litigation  or  unusual  proceedings  are  authorized  by  the  Insured,  a  reasonable  attorney's  fee,  in  addition  to  the  regular  collection  fee 
will  be  chareed. 

fr— CLAIM  FOR  EXCESS  LOSS: 

Final  Statement  of  Claim— Tf  any  claim  for  excess  loss  is  "made  under  this  Policy,  a  Final  Statement  of  Claim,  duly  sworn  to,  shall  be  made  by 
the  Insured  upon  blank  forms  which  shall  be  furnished  by  this  Company  upon  application,  and  such  final  statement  must  be  received  by  this  Company 
at  its  office  in  Chicago,  Illinois,  within  thirty  (30)  days  after  the  last  date  permitted  for  filing  accounts  under  this  Policy;  otherwise  there  shall  be 
no  liability  upon  the  part  of  the  Company  under  this  Policy. 

The  adjustment  shall  be  had  within  forty-five  (45)  days  after  the  receipt  by  this  Company  of  such  Final  Statement,  and  the  amount,  if  any,  then 
ascertained  to  be  due  on  covered  proved  losses  shall  at  once  become  payable. 

Interim  Statements  of  Claim — For  the  purpose  of  enabling  the  Insured  to  receive  adjustments  from  time  to  time  under  this  Policy,  and  prior  to 
the  final  adjustment,  the  Insured  shall  be  privileged  to  file  with  the  Company  preliminary  statements  'of  claim  for  excess  loss,  upon  blanic  forms 
which  shall  be  furnished  by  this  Company  upon  application;  provided  that  no  claim  for  loss  shall  be  included  in  such  preliminary  statements,  nor  con- 
sidered in  any  interim  adjustment  under  this  Policy,  unless  the  insolvency  shall  have  been  as  defined  in  Subdivisions  (2)  to  (14),  inclusive,  of  Condition 
3  of  this  Policy.  Oaims  on  accounts  filed  for  collection  under  Subdivision  (I)  of  said  Condition  3,  unless  they  have  become  insolvent  under  Subdivisions 
(2)  to  (14),  shall  not  be  considered  prior  to  a  final  adjustment  under  this  Policy 

The  Company,  within  forty-five  (45)  days  after  the  receipt  of  any  such  statements  of  claim,  shall  adjust  all  accounts  mentioned  therein,  that 
were  insolvent  under  Subdivisions  (2)  to  (14)  of  Condition  3  as  aforesaid,  and  'filed  within  the  time  provided,  and  which  come  within  the  Conditions 
and  Stipulations  of  this  Policy,  and  immediately  pay  to  the  Insured  the  amount  of  excess  loss,  if  any,  then  found  due 

In  no  event  shall  the  amount  of  Normal  Loss  deducted  in  all  adjustments  under  this  Policy  exceed  in  the  aggregate  the  amount  of  the  agreed 
Normal  Loss  as  ascertained  in  the  final  adjustment. 

If  the  Company  has  paid  to  the  Insured,  in  all  interim  adjustments  under  this  Policy,  prior  to  ascertaining  the  actual  amount  of  the  aforesaid 
agreed  Normal  Loss,  an  amount  in  excess  of  the  amount  which  would  have  been  paid  if  the  amount  of  such  actual  Normal  Loss  had  been  ascertainable 
It  the  time  of  such  payment,  the  Insured  shall  at  once  refund  such  excess  to  the  Company. 

7 — METHOD  OF  ADJUSTMENT — To  ascertain  the  net  loss  in  any  adjustment  under  this  Policy,  there  shall  be  deducted  from  each  covered  and 
proven  gross  loss,  less  the  co-insurance  thereon* 

(1)  All  discounts  to  which  the  debtor  would  have  been  entitled  had  the  debt  been  paid  at  the  date  of  insolvency, 

(2)  All  amounts  collected  thereon  and  all  amounts  which  may  .have  been  obtained  from  any  other  source; 

(3)  The  amount  of  goods  returned  or  replevined,  when  such  goods  are  in  the  undisputed  possession  of  the  Insured; 

(4)  An  amounts  mutually  agreed  upon  as  thereafter  obtainable. 

If  no  mutually  satisfactory  agreement  should  be  reached,  as  to  the  amounts  thereafter  obtiinable  on  any  loss,  this  Company  shall  allow  the  unpaid 
part  of  such  loss,  so  far  as  covered.  The  Insured  shall  assign  to  thia  Company  all  accounts  admitted  in  adjustment,  t'^^-ther  with  all  securities  arid 
guarantees  relating  thereto,  except  those  accounts  upon  which  the  amount  thereafter  obtainable  is  mutually  agreed  upon.  Such  assigned  accunts 
shall  be  handled  by  the  Company  for  the  joint  account  of  the  Insured  and  the  Company  as  their  interests  may  appear. 

If  the  indebtedness  of  the  debtor  to  the  Insured  at  the  time  of  the  insolvency  is  not  covered  in  full  by  this  Policy,  then  said  deductions  shall 
be  made  pro  rata,  viz.;  in  the  ratio  which  the  amount  covered  bears  to  the  whole  of  such  indebtedness. 

From  the  aggregate  amount  of  the  net  covered  proven  losses  thus  ascertained,  there  shall  be  deducted  the  agreed  Normal  Loss,  and  the  b.-Jance, 
if  any,  shall  be  the  amount  due  the  Insured.  If  the  net  amounts  realized  by  the  Company  on  the  claims  assigned  to  it.  as  above  provided,  shall  la  the 
aggregate  exceed  the  total  sum  paid  to  the  Insured,  the  Company  shall  refund  theoet  excess. 

8 — ^COLLATERAL  BENEFITS — This  Policy  is  not  negotiable  but  the  Company  will,  upon  written  request  of  the  Insured,  provi.Ie  thit  any  excess 
loss,  that  may  become  due  and  payable  under  its  Conditions  and  Stipulations  shall  be  paid  to  any  Bank  or  Trust  Company  designated  by,  and  for 
account  of  the  Insured. 

9t-TERMINATION — Thb  Policy  may  be  terminated  at  any  time  by  either  of  the  parties  hereto,  upon  ten  (10)  days'  written  notice  to  the  other 
party,  stating  when  termination  shall  be  effective. 

If  the  Insured  elects  to  terminate  the  Policy  the  earned  premium  shall  be  computed  and  adjusted  as  provided  for  in  Condition  1.  on  the  Insured's 
gross  shipments  and  deliveries  to  the  date  of  such  termination,  and  the  Company  shall  refund  to  the  Insured <he  unearned  premium,  if  any,  less  twenty 
(20%)  percent.  If  any  claim  (or  excess  loss  is  made,  a  Final  Statement  of  Claim  shall  be  filed  by.  and  an  adjustment  shall  be  made  with,  the  Insured  in 
the  same  time  and  manner  as  if  this  Policy  had  originally  by  its  terms  been  made  to  end  at  the  date  of  such  termination;  provided,  however,  that  only 
such  covered  accounts  as  were  filed  with  the  Company  prior  to  the  date  of  such  termination  shall  be  covered  by  this  Policy. 

If,  during  the  term  of  this  Policy,  the  Insured  shall  become  insolvent,  or  shall  cease  to  continue  business  as  heretofore  carried  on.  or  shall  go  into 
liquidation,  or  being  a  partnership  shall  be  dissolved,  then  this  Policy  shall  ipso  fada  terminate  and  shall  be  adjusted,  in  all  respects,  the  same  as  though 
the  Insured  had  elected  to  terminate  this  Policy  as  above.  Temporary  interruption  by  fire  or  by  strike,  or  the  death  or  withdrawal  or  admission  of 
a  member  of  a  partnership  composed  of  more  than  two  members,  shall  not  be  considered  a  discontinuance  or  dissolution. 

If  the  Company  elects  to  terminate  this  Policy  the  earned  premium  shall  be  computed  and  adjusted  as  provided  for  in  Condition  1 ,  on  the  Insured's 
gross  shipments  and  deliveries  to  the  date  of  such  te.-niinationj  and  the  Company  shall  refund  to  the  Insured  the  unearned  premium,  if  any,  but  no 
lender  or  payment  of  any  unearned  premium  is  required  to  make  termination  by  the  Company  effective.  Covered  losses  on  shipments  made  up  to  the 
date  of  such  termination  shall  be  provable  under  this  Policy,and  the  Normal  Loss  shall  be  calculated  only  on  the  gross  shipments  made  up  to  the  date  of  such 

termination.     If  any  claim  for  excess  loss  is  made,  a  Final  Statement  of  Claim  shall  be  filed  by  the  Insured  not  later  than days  after  the 

date  of  such  termination,  but  Interim  Statements  of  claim  may  be  filed  prior  to  said  date  and  adjustment  shall  be  made  with  the  Insured  in  the  same 
time  and  manner  as  if  this  Policy  had  originally  by  its  terms  been  made  to  end  at  the  date  of  such  termination. 

10— GENERAL  PROVISIONS— The  premium  on  this  Policy  shall  be  paid  by  check  to  the  order  of  the 
COMPANY 

ThisCompany  will  acknowledge  receipt  of  all  Notifications  qf  Claim  and  Interim  and  Final  Statements  of  Oaim,  but  neither  the  acknowledgment 
nor  the  retention  thereof  by  this  Company,  nor  its  failure  to  acknowledge  receipt,  shall  be  deemed  an  admission  of  liability  or  a  waiver  of  any  of  the 
provisions  of  this  Policy  by  this  Company. 

,  con- 
Ijust- 

„  „       _       -^ ,- I  permit 

this  Company  to  examine  and  take  extracts  from  the  books,  securities  and  papers  of  the  Insured  bearing  upon  any  matter  involved  in  any  adjustment 
under  this  Policy,  or  upon  any  representation  or  warranty  made  in  the  application  for  this  Policy  or  any  prior  Policy  of  Credit  Insurance  issued  by 
this  Company  to  the  Insured,  or  upon  any  claim  made  either  by  the  Insured  or  by  this  Company  under  this  Policy. 

The  rendering  of  any  estimate  or  statement  or  making  of  any  previous  settlement  shall  not  bar  the  examination  herein  provided  for,  nor  the 
Company's  right  to  additional  premium,  nor  to  a  refund  of  any  amount  overpaid  to  the  Insured  prior  to  verification  by  the  Company. 

No  Agent  is  authorized  to  make  any  alteration  in,  or  addition  to,  this  Policy;  and  no  addition  to,  or  alteration  of,  this  Policy  shall  be  valid  unless 
cjpied  by  the  General  Manager  of  the  Company  for  the  United  States. 

All  provisions  of  this  Policy  are  to  be  deemed  conditions  precedent  to  any  claim  by  the  Insureti. 

No  suit  or  action  on  this  I^olicy  shall  be  brought  or  be  sustainable  until  after  compliance  by  the  Insured  with  the  terms  of  this  Policy,  nor,  ilt 
JCie  absence  of  any  statutory  provision  to  the  contrary,  unless  commenced  within  twelve  months  after  its  expiration. 


496    INSURANCE  PRINCIPLES  AND  PRACTICES 


cxv 


SURETY  BOND   (INDIVIDUAL) 


THE INSURANCE  CO. 


$ 


^PREMIUM, 


'BOND  No,  K- 


Eap)oy^t 


Corpora* 
tion. 


ts  and  representa- 


CUase. 


EfTipioyco* 


«  Sn  rOttdthfratlDn  nf  a  certain  premium  & 

s    tions  made  by .. ..._^^^. „.•. 

3    (hereinafter  called  the  Emj 

Called    the    Corporation),  hereby  agrees 
pecuniary  loss  not  exceeding.. 

Dollars    ($. 

fkr  shall  have  sustained  of  money  or  other  personal  property  (including 

8  that  for  which  the  Employer  is  responsible)  by  any  act  or  acts  of  fraud,  dishonesty. 

9  forgery,  theft,  embezzlement,  wrongful  abstraction  or  wilful  misapplication  on  the  part 

11  (hereinafter  called  the  Employed)  directly  or  through  connivance  with  others,  com 

12  mitted  by  the  Employed  in  connection  with  the   duties  of  any   position   to   whicli 

13  lie  may  be  assigned  by  the  Employer  during  the  term    of  this  bond,  or  of  aaj 

14  renewal  thereof. 


CaDcelU- 
tioo  of 
bond. 


APPENDIX  497 

CXV— Continued 

55  The  foregoing  agreement  is  subject  to  the  following  conditions: 

T"ra-  16  I.    The   tenn  of   this  bond   begins  on   the day  of..._.. 19 ,  aj  (toon, 

1 7     standard  tirae,  at  the  Employer's  address  hereinbefore  stated,  and  ends  on  the...„ day  of. 

iS     ifj _,  at  noon,  standard  time,  at  the  said  address.     In  case  this  bond  is. renewed  for  one  or  more  terms,  the  entire 

1 9  period  for  which  the  bond  is  in  force  shall  be  deemed  the  term  of  the  bond. 

Amount  ot    jo  2.     This  bond  may  be  contirjied  from  year  to  year  so  long  as  the  Corporation  and  the  Employer  agree  so  to  do, 

Corpora* 

nrbatT         ^'  ''"'  ''^^  aggregate  liability  of  the  Corporation  from  the  effective  date.of  this  bond  to  the  date  of  the  expiration  or 

22  any  renewal  of. this  bond  for  or  on  account  of  any  act  or  acts  of  the  Employed,  shall  not  exceed  tha  amount  for 

23  which  the  Employed  shall  have  been  specifically  guaranteed  at  the  time  such  act  or  acts  shall'  have  been  committed. 

Not  liable      j ,  ,      The  Corporation  shall  not  be  liable  hereunder  for  any  default,  the  proceeds  of  which  shall  have  been  applied 

lorprc.ex. 

istiog  debt.  ,        ..,         ,                 ,.                        .     •          J    i_ 

25  to  the  payment  to  the  Employer  of  a  preexisting  debt. 

s6  4.     This   bond   may  be   cancelled   by  the  Corporation  upon  thirty  days'  notice  to  the  Employer,  or  by  the 

27  Employer  upon  notice   in   writing   to   the   Corporation  specifying   the  date   of  the  termination.     Thereupon  the 

28  Corporation  shalU  tefund  the  unearned  premium  for  the  bond,  if  no  claim  has  arisen  thereunder. 

wiKtiiou     2(j  5.    The  Employer  shall  file  with  the  Corporation  any  claim  for  which  the  Corporation  is  liable  heretmder  within 

is  to  be 

iHscovcted.    ^^  fifteen  months  after  the  Employed  shall  have  died  or  left  the  service  of  the  Employer,  or  within  fifteen  months  after 

31  the  lapsing  or  cancellation  of  this  bond  from  any  cause  whatsoever. 

Notice oi      32  6,    The  Employer  shall  notify  the  Corporation  of  any  act  of  the  Employed  which  would  constitute  a  claim 

lOM. 

33  hereunder  immediately  or  as  soon  as  practicable  after  such  act  shall  have  come  to  the  knowledge  of  the  Employer. 

34  The  Corporation  shall  be  responsible  hereunder  only  for  any  acts  of  the  Emplo)'ed  up  to  the  time  of  such  notification, 

35  and  if  the  Employer  shall  condone  any  fraudulent  act  of  the  Employed  and  continue  him  in  service  without  notifying 
3O  .the  Corporation,  all  losses  subsequent  to  such  condonation  shall  be  irrevocable  against  the  Corporation. 

payment       37  Payment  of  claim  under  this  bond  shall  be  made  within  three  calendar  months  after  requisite  proof  shall  have 

of  claim. 

33  been  afforded  the  Corporation  of  the  loss  and  of   the  validity  of  the  claim  made,  such  proof  to  include,  if.the_ 

39  Corporation  s'nail  so  desire,  an  itemized  statement  of  the  claim,  giving  the  dates  when  the  losses  occurred. 

Employer'!    ^o  8.     No  suit  or  action  shall  be  maintamed  under  -this  bond  until  after  three  months  from   the   date  of. filing 

right  of 

'""""'  ■       41  proof  with  the  Corporation,  nor  shell  be  brought- at  all  unless  within  two  years  from  the  time  when  the  cause  of 

42  action  accrued. 

Atkitraiion    43  9.     In  the  case  of  disputed  liability,  if  the   Corporation  and  the  Employer  shall   so  elect,  any  claim   made 

of  disputed 

''"'"        44  hereunder  shall  be  subject  to  arbiuation  in  the  manner  following:     The  Employer  and  the  Corporation  shall  each 

/1 5  appoint  one  arbitrator;  such  arbitrators  shall  appoint  a  third;  and  the  decision  of  the  majority  both  as  to  the  amount. 

46  in  dispute  and  as  to  the  expenses  of  the  arbitration  shall  be  finaL 


498    INSURANCE  PRINCIPLES  AND  PRACTICES 

CXV— Continued 

0  Stt  WUttPBS  WljrrPOf,  the  Corporation  has  caused  this  bond  to  be  executed  by 

48  its  authorized  Manager,  but  this  bond  shall  not  be  in  force  until  countersigned  by  a 

49  duly  authorized  Agent  of  the  Corporation. 

50 


St 


By 


5» 

53 


Manager  and  Jaorruy /or  t?ie  VniUd  ISMt*, 


Countersigned  aT^ 


Date, 


By-- 


Agent, 


♦ 

o 

C 
O 

PQ 


c 


9 


: 
i 

! 

i 

\ 

\ 

i 

: 

i 

1               : 

1               1 

1 

Bond  Expires 

APPENDIX 


499 


CXVI 


SURETY  BOND  (SCHEDULE) 


THE  INSURANCE  CO. 


t^MOum, 


'BOND  No.  F.. 


"PREMIUm 


S- 


3n  ronBibfrafum  of  a  certain 


BaptoTtr,      «    tioDS  made  by 

3     (hereinafter  called  tli^^^mployer) 


Corpora. 
Uoo. 


f  the  statements  and  representa» 


4  (liereinafter    called    the    Corporation),  hereby  agrees 

5  to  reimburse  the  Employer,  subject  to  the  terms  and  conditions  herein  set  forth,  for 

6  the   loss   of   any  money   or  other  personal  property  (including   that   for  which   the 
c^K*       '  Employer    is    responsible),   as^  shall   be   sustained   by   the   Employer    by   reason   of 

8  the   fraud,  dishonesty,  forgery,    theft,  embezzlement,  wrongful    abstraction  or  wilful 

9  misapplication  on  the  part  of  any  of  the  Employes  named  in  the  schedule  attached 
«o  hereto  and  hereby  made  a  part  of  this  bond  or  iereafter  added  thereto  by  an  acceptance 
«i  notice  executed  by  tlie  Corporation  during  the  term  of  this  bond  or  of  any  renewal  thereof. 

Bonn  2469— Fidelity  Sclifdulc. 


500    INSURANCE  PRINCIPLES  AND  PRACTICES 

CXVl— Continued 

(9  The  foregoing  agreement  is  subject  to  the  following  conditions: 

13  1.    The  term  of   this  bond  begins  on  the .day  of. 19 ,  at  doob, 

14  standard  time,  at  the  Employer's  address  hereinbefore  stated,  and  ends  on  the day  of. . 

15  19 ,  at  noon,  standard  time,  at  the  said  address.     In  case  this  bond  is  renewed  for  one  or  more  terms,  the  entire 

16  period  for  which  the  bond  is  in  force  shall  be  deemed  the  term  of  the  bond. 

Amamtof    17  2.    This  bond  may  be  continued  from  year  to  year  so  long  as  the  Corporation  and  the  Employer  agree  so  to  do, 

Corposst- 

^."L          1 8  but  the  aggregate  liability  of  the  Corporation  from  the  effective  date  of  this  bond  to  the  date  of  the  expiration  op 

1 9  any  renewal  of  this  bond  for  or  on  account  of  any  act  or  acts  of  any  Employe  specified  on  said  schedule  or  add««l 

20  thereto  shall  not  exceed  the  amount  for  which  the  Employe  shall  have  been  specifically  guaranteed  at  the  time  such 
a  I  act  or  acts  shall  have  been  committed. 

Not  liable      2  2  3.    The  Corporation  shall  not  be  liable  hereunder  for  any  default,  the  proceeds  of  which  shall  have  been  applied 

<bTpre.cx* 

tettog  ifcbi.    J  ^  jij  ji^g  payment  to  the  Employer  of  a  pre-existing  debt. 

caD«ii».      24  4.    This  bond   may  be  cancelled  by  the  Corporation  upon  thirty  da)'s*  notice  to  the  Employer,  or  by  the- 

UODOf 

''°~'-           25  Employer  upon  notice  in  writing  to  the  Corporation  specifying  the  date  of  the  termination.    Thereupon  the 

26  Corporation  shaH  refund  the  unearned  premium  for  the  bond,  if  no  claim  has  arisen  thereunder. 

wh«  loM     27  5.    The  Employer  shall  file  with  the  Corporation  any  claim  for  which  the  Corporation  is  liable  hereunder  witbia 

n  10  be 

jtMOTCRd.    ^g  fifteen  months  after  the  retirement  of  any  Employe  from  the  service  of  the  Employer,  or  within  fifteen  months  after 

29  the  lapsing  or  cancellation  of  this  bond  from  any  cause  whatsoever. 

Ttattfi       JO  6.     The  Employer  shall  notify  the  Corpora'tion   of  any  act  of  any  Employe  which  would  constitute  a  claim 

1MB. 

31  hereunder    immediately   or   as  soon   as    practicable   after  such  act  shall  have  been  discovered  by  the  Employer. 

32  The  Corporation  sliall  be  responsible  hereunder  only  for  any  acts  of  the  Employe  up  to  the  time  of  such  discovery, 
53  and,  if  the  Employer  shall  condone  any  fraudulent  act  of  the  Employe  and  continue  him  in  service  without  notifyii^ 
34  the  Corporation,  all  losses  subsequent  to  such  condonation  shall  be  irrevocable  against  the  Corporation. 

rtfmrtt       35  J.     Payment  of  claim  under  this  bond  shall  be  made  within  three  calendar  months  after  requisite  proof  shall  have 

of  claim 

36  been  afforded  the  Corporation  of  the  loss  and  of   the  validity  of  the  claim  made,  such  proof  to  include,  if  the 

37  Coiporalion  shall  so  desire,  an  Itemized  statement  of  tbe  claim,  giving  the  dates  when  the  losses  occurred. 

Empinjei-i    -g  g      jvjg  juit  Or  action  shall  be  maintained  under  this  bond  until  after  three  months  from   the  date  of  filing 

39  proof  with  the  Corporation,  nor  shall  be  brought  at  all  unless  within  two  years  from  the  time  when  the  cause  of 

40  action  accrued. 

Aibitniion    41  9.     In  the  case  of  disputed  liability,  if  the   Corporation  and  the  Employer  shall  so  elect,  any   claim   made 

•f  dispioed 

***'"''        42  hereunder  shsll  be  sobjecl  to  arbitraticA  in  the  manner  following.     The  Employer  and  the  Corporation  shall  each 

43  appoint  one  arbitrator ;  such  arbitrators  shall  appoint  a  third  ;  and  the  decision  of  the  majority  both  as  to  the  amount 

44  in  dispute  and  as  to  the  expenses  of  the  arbitration  shall  be  finaL 


APPENDIX 


501 


CXYl— Continued 

45  Hn  Wltmss  Miltrsof,  the  Corporation,  has  caused  this  bond  to  be  executed  by 

46  its  authorized  Manager,  but  this  bond  shall  not  be  in  force  until  countersigned  by  a 

47  duly  authorized  Agent  of  the  Corporation. 


>8 


Bjr 


»» 


Cqftntenigfied  at. 


Ifanager  and  Mtomty/or  tha  United  Safc/. 


4tn 


♦ 

O 

a 
o 


"3 


I 


<a 


502    INSURANCE  PRINCIPLES  AND  PRACTICES 


CXVII 


CONTRACTORS'  BOND 


l^^uiir^o^  ^i^^mt^^^^m 


NO.. 


2Cnnm  all  Mm  Iig  \\^m  ^prrs^nts,  Tha- 


a  corporation,  organized  under  the  laws  of  the  State  of__ -r-i 

(hereinafter  called  the  Principal)  and  the  FIDELITY  AND   GUARANTY   COM- 

PANY, a  corporation  created  and  existing  under  the  laws  of  the  State  of  Marjiand,  and  whose  principal  office 
is  located  in  (hereinafter   called  the  Surety),  are  hAA  and  firmly  bound  unto 


.^hereinafter  called  the  Obligee),  in  the  full  an 


to  the  payment  of  which  sum,  well  and  truly  t 

assigns,  and  the  said  Surety  binds  itself,  its  s' 

presents.  ' 

Signed,  sealed  and  delivered  this 


IShprFSS,  said  Principal  has  entered 


um  of- 


-Dollars,  lawful  money  of  the  United  States, 


de,  the.  said  Principal  binds  itself,  its  successors  and 
s  and  assigns,. jointly  and  severally,  firmly  by  these 


-day  of- 


rtain  written  contract  with  the  Obligee, 


_A.  D.  10- 


APPENDIX  503 

CXWll— Continued 
Sfom,  flfrrrCorr,   The  condition  of  the  foregoing  obligation  is  soch  that  i(  the  said  Principal    shal 

weB  and  truly  indemnify  and  save  harmless  the  said  Obligee      from  any  pecuniary  loss  resulting  from  the 

tyreach  of  any  of  the  terms,  covenants  and  condiiions  of  the  said  contract  on  the  part  of  the  said  Principal 

to  be  performed,-  then  this  obligation  shall  be  void;  otherwise  to  remain  in  full  force  and  effect  in  law: 

PROVIDED,  however,  that  this  Bond  is  issued  .subject  to  the  following  conditions  and  provisions: 

Jiral— That  no  liability  shall  attach' to  the  Surety  hereunder  unless,  in  the  event  of  any  default  on  the 
part  ol  the  PtmcipaJ  in  the  performance  of  any  of  the  terms,  covenants  or  conditions  of  the  said  contract, 
tfie  Obligee  shall  promptly,  and  in  any  event  not  later  than  thirty  days  after  knowledge  of  such  default, 
deliver  to  the  Surety  at  its  office  in  the  City  of  Nvritten  notfre  thereof  with  a  statement  of  the 

principal  facts  showing  such  default  and  the  date  thereof;  nor  ^fefthe  said  Obligee  shall  deliver  written 
notice  to  the  Surety  at  its  office  aforesaid,  and  the  consent  of  fJ^*^ety  thereto  obtained,  before  makmg  to 
the  Principal    the  6nal  payment  provided  for  under  the  contr5S?*e«in  referred  to. 

^rrimllL  -That  in  case  ol  such  default  on  the  part  of  t^^^cipal  ,  the  Surety  shall  have  the  right, 
U  it  so  desire,  -to  assume  and  complete  or  procure  the  completfiggisaid  contract ;  and  in  case  of  such  default. 


the  Surety  shall  be  subrogated  and  entitled  to  all  the  righwSH^roperties  of  the  Principal    arising  out  of. 
the  said  contract  and  otherwise,  including  all  securities  and  lliiili"iiiifflir  -  theretofore  received  by  the  Oblige* 
and  all  deferred  payments,  retained  percentages  and  credit^u^»>the  Principal      at  the  time  of  such  default, 
or  to  become  due  thereafter  by  the  terms  and  dates  of  the  contract. 

JFljirJL— That  in'no  event  shall  the  Surety  be  liable    for  a  greater  sum  than  the  penalty  of  this  Bond, 
or  subject  to  any  suit,  action  or  other  proceeding  thereon  that  is  instituted  later  than  the ;.  _.— 

day  of . \.  D.  19 

^^imrtlf. — (a)  '  That  the  Surety  shall  not  be  liable  for  damages  for  injuries  to.  the  person  of  anyone, 

tinder  or  by  authority  of  any  statutory  provision  for  damages  or  compensation  to  any  employe,  or  otherwise; 

aad 

(b.)     Shall  not  be  obligated  to  furnish  any  bond  or  obligation  other  than  the  one  executed. 
9n  trfitunong  mlirrrof.  the  said  Principal  has  caused  these  presents  to  be  sealed  with  its  corporate  seal, 
attested  by  the.signature  of  its  duly  authorized  officers,  and  the  said  Surety  has  caused  these  presents  to  be  sealed 
With  its  corporate  seal.duly  attested  by  the  signature  of  its  Attorney-m-tact,  the  day  arid  year  first  above  written. 

.,. (SEAL) 

Signed,  sealed  and  delivered  in  the 

presence  of. . (SEAL) 

: . (SEAL) 


IFilteltlg  anil  ^mtrantg  GIimt|mng. 


jittomey-in-faet. 


INDEX 


Abandonment,  fire,  208 

marine,  28+ 
"Abstract  plant,"   312 
Accident  and  health  insurance,  138-152 
analysis  of  policies,   145-148 
compulsory    health    insurance,    150- 

152 
losses  due  to  accidents,   138-13f 
rates,  149-150,  app.  XIX 
reserves,  150 
types  of  policies,  141-145 
Account  bonds,  342 
Actual  cash  value,  meaning  of,  205-206 
Actual  loss  ratii,  181 
Actual  total   loss,   marine,  284 
Adjustment   of    face    value,    life,    see 

Face  Value 
Adjustment  of   losses,  credit  insurance, 
331-333 
fire  insurance,  261-265 
marine  insurance,  282-283 
title  insurance,  316 
Adjustment    of    premiums,     life,     see 

Premiums 
Advantages    and    disadvantages    are 
discussed     under     the     subjects 
to  which  they  pertaia 
Adverse  selection,  107 
Agents,   life 

contract,  42,  app.  V 
general  agents,  40-41 
soliciting  agents,  41 
property 
contract,  42,  43,  app.  XLIX 
general   agents,  42 
local  agents,  42-43 
special  agents,  42 
Agreements,  rate,  295-296 
Alterations,  of  building,  215 
Amounts  covered  by  fire  policy,  205- 

210 
Analyses    of    policies,    see    under    the 

various   types   of   insurance 
Analytic    system,    239-240,    app.    LII- 

LVI,  also  see  Dean  Schedule 
Annual  premiums,  life,  82-83 
Annuities,  last  survivor,  69 
life,  65 


reversionary,  69 
Annuit}'  due,  82 
Appeal  bonds,  342 
Application,    for    life    insurance,    124, 

app.  I  and  II 
Apportionment  of  surplus,  111,  112 
Apportionment   and   contribution,   fire, 

262-265 
Appraisal,    fire,    259-260 
Assessment  insurance,   128-129 
Assignment,   fire 

after  a  loss,  197-198 
before  a  loss,   196-197 
method  of  assigning,  195-196 
necessity  for,  194-195 
policy  provision   relating  to,   195, 
219-220 
life 

form,  app.  VIII 
method,   123-124 
purpose,  122-123 
title,  315 
Associations,  underwriters', 
fire,  44 
local,  47-50 

Lloyds,  34-35,  app.  LX 
marine,  294-295 
national,  46-47 

National     Board     of     Fire     Under- 
writers', 45 
sectional,  47-50 
Assumption  of  risk,  157 
"At  and  from,"  meaning  of,  278 
Attachment  bonds,  342 
Automatic  sprinkler  system,  230 
Automobile  insurance,  299-310 

collision  insurance  policy,  305,   app. 

CIV 
collision  insurance  rates,  305-306 
commercial   cars,   304,   306,   309 
fire   insurance   policy,   306-307,   app. 

CVI 
fire    insurance    rates,    307-310,    app. 

CIX,  CXI 
liability  and  property  damage  rates, 

300-305,  app.  CX,  CXII 
liability  policies,   299-300,   app.   CII 
manufacturer's    and    dealer's    cars, 
304-305,  306,  309 


SOS 


506 


INDEX 


private  passenger  cars,  300-301,  305- 
309 

property  damage  policies,  300,  app. 
CV 

public  automobiles,  303-304,  306,  309 

theft  insurance,  310 

types  of  companies,  299 

types  of  coverage,  299 
Average  clause,  233-244 
Average,   law  of,  its  operation  in  in- 
surance,  22-26 

B 

Balance  sheet,  fire  insurance  company, 
247-248 

life  insurance  company,  96 

marine  mutual,  app.  CI 
Barratry,  270 
Beneficiaries,    compensation    insurance 

schedule  of  benefits,   164-166 
Beneficiary,  life,  120-121 

change  of,  121-122 
Benefits  of  insurance  (uses),  3-18 
Benefits,    schedule    for    compensation 

insurance,   164-166 
Binder,  fire,  210,  app.  XLI 

marine,  app.  LXI 
Blanket  policies,  fire,  224-225 

marine,  272 
Bonding,  see  Corporate  Bonding 
Bonds,  see  Corporate  Bonding 
Bradstreet's,  328 
Branch  office  system,  41 
Brokers,  43-44 
Builder's  risk,  274-275 
Burial  expenses,  165 
Business  failures,   322-324 
Business  interruption  indemnity,  209 
Business  uses  of  insurance,   see  Uses, 
3-18 


Calculation    of    premiums,    see    Pre- 
miums 
Calculation  of   reserves,  see  Reserves 
Cancellation  of  fire  policy,   211-213 
Cancellation  notice,   app.  XLII 
Cargo  policies,   271,   app.  LXII 
Cash  surrender  values,  103-105 

developments  of  cash  value  clause, 
104-105 
Certificates   of   insurance,    automobile, 

app.  cm 

fire,  196 


Chattel  mortgage,  216-217 
Children,  insurance  on,   130 
Claims,    settlement    of,    compensation 
insurance,   166-167 
life  insurance,   125 
Classes  of  marine  policies,  271-273 
Classification,  of   insurance   organiza- 
tions, 28-38 
of  underwriters'   associations,  44-45 
see    also    under    particular    subjects 
Clauses  endorsed  on  fire  policies 
decreasing  liability  or  hazard,  229- 

230 
emergency  clauses,  230-231 
limiting  amount  payable,  231-233 
permits    waiving    policy    provisions, 

229 
pertaining  to  title  or  interest,  230 
Clauses,   marine,  see   app.  LXII-C 

fire,  222-233,  app.  XXXI-XL 
Co-insurance  clause,  credit  insurance, 
332-333 
fire  insurance,   231-232,   app.  XXXI 
Collision  insurance,  automobile 
policy,  305,  app.  CIV 
rates,   305-306 
marine,  290-291 
Collision  of  vessels,  290-291 
Combination  accident  and  health,  143, 

app.  XVII,  XVIII 
Commercial  cars,  304,  306,  309 
Commission  form,  223 
Commissions,  43,  app.  V,  XLIX 
Community  benefits  of  insurance,  15-18 
Companies,  t>'pes  of,  28-38 
Compensation  laws 

accidents  covered,  163-164 
classification    of,    app.   XXI,   XXII 
insurance      requirements,       167-168, 

app.  XXII 
methods  of  insurance,  168-171 
nature  of,  162-163 
Compensation     policy,     171-173,     app. 

XXIII 
Compensation  reserves,   178-183 
Compound  interest,  75-76 
Concurrent  policies,  262-263 
Consequential  damage  clause,  229 
Constructive  total   loss,  284-285 
Contingent  or  survivorship  insurance, 

68-69 
Contract    bonds,     339,     346-347,     app. 

CXVII 
Contribution,  fire  losses,  262-265 
Contributory  negligence,  151 
Convertible  feature,  58,  134-135 


INDEX 


SOI 


Corporate  bonding 

bonds     covering     honesty,     339-342, 
app.  CXV,  CXVI 
account  bonds,  342 
fidelity  bonds,  339-342 
bonds    involving    financial    strength 
only,  court  bonds 
appeal  bonds,  342 
attachment  bonds,  342 
bonds  for  cost,  342 
bonds  for  distraint  of  rent,  342 
indemnity  bonds  to  sheriff,  342 
injunction    or    mandamus    bonds, 

342 
replevin  bonds,  342 
bonds  involving  honesty  and  ability 
fiduciary  bonds,  345 
license  bonds,  345-346 
public  official  bonds,  343-345 
bonds     involving     honesty,     ability, 
and  financial  strength 
contract      bonds,      346-347,      app. 

CXVII 
depository  bonds,  347-348 
franchise  bonds,  347 
bonds  involving  honesty  and  finan- 
cial   strength 
custom  house  bonds,  349 
internal  revenue  bonds,  348-349 
lost  instrument  bonds,  348 
miscellaneous  bonds,  349 
development  of,  336 
divisions  of  the  subject,  338-339 
nature  of  suretyship,  336-337 
rate  making,  349-350 
Corporation  insurance,   120 
Cost,  elements  of  in  life  insurance,  72 
Court  bonds,  342 
Coverage — see      under      the      various 

types  of  insurance 
Credit  insurance,  322-335 
analysis  of  policy,   325-335 
adjustment  of  loss,   331-333 
application,  325,  app.  CXIV 
coverage,  327-330 
endorsements,  334 
insolvency,    330-331 
insuring  clause,  326-327 
premium,   327 
salvage,  335 
termination,   333-334 
business   failures,   322-324 
credit  ratings,  327-328 
general  plan,  324 
limited  policies,  324 
normal   loss,  332-333 


"optional"  policy,  327 

policy  limits,  329 

types  of  policies,  324-325, 

unlimited     policies,      324-335,     app. 
CXIII,  CXIV 
Credit,  insurance  as  a  basis  of,  8-10 
Credit  ratings,  327-328 
Cross  liabilities,  290-291 
Custom  house  bonds,  349 

D 

Daily      report      (fire      agents),      app. 

XLVII 
Dangerous      article,      229-230,       app. 

XXVIII 
Dealers  cars,  304-305,  306,  309 
Dean  schedule 

basis  rate,  239-240,  app.  LII 
calculation    of    building    and    con- 
tents rate,  240,  app.  LVI 
calculation    of    building    rate,    240, 

app.  LV 
contents  table,  app.  LIII 
occupancy  table,  240,  app.  LIV 
Deductible    average    clause,    288 
Deferred  dividends,   115-116 
Definition  of  insurance,   19 
Depository  bonds,    339,    347-348 
Depreciation,  205,  207 
Description  of  property,  224 
Development  of  corporate  suretyship, 

336 
Deviation,  270 

Diagram — showing  fire   insurance   re- 
serve, 250 
Diagrams     showing     investment     ele- 
ment in  life  insurance 
endowment,   64 
limited  payment  life,  62 
ordinary  life,  61 
term  insurance,    59 
Diagrams    showing    loading    of    life 
insurance  premiums 
combination   loading,   87 
flat  loading,  86 
Diagrams  showing  reserves  on  differ- 
ent types  of  policies,  93 
Differences    between    life    and    other 

forms  of  insurance,  26-27 
Direct  loss,  by  fire,  202-203 
Disability,  70,   139-141,  app.  Ill,  IV 
partial,   147,  165 
total,   146-147,   164 
Distribution  of  cost  by  insurance,  7-8 
Distribution   of   dividends,    115-116 
Distribution   of  surplus,    112-113 


508 


INDEX 


Dividends,  life 

illustrative,  114,  116 

nature  of,   113 

options,  117-118 

size  and  importance,   113-114 

sources  of,   116-117 

special  types,   116 
Divisible  surplus,   113 
Doctrine  of  entirety  of  contract,  214- 

215 
Dynamo  clause,  229 


Effect  of  premiums  on   reserve,  89-93 

E.  G.  Richards,  240 

Electric  cars,  309 

Electricity,  230 

Employers'  liability — see  Liability 

Endorsements — see   Clauses 

Endowment  policies,  63-64,   app.  Ill 

Entirety  of  contract,  214-215 

Events  covered  by  fire  policy,  202-205 

Excess  floater,  225-226 

Exemption    from    liability    under    fire 
policy,   203-205 

Expenditures,   marine,  289-291 

Expenses,  life  insurance,  83-84 

Experience,  grading  and  rating  sched- 
ule, 240-242 

Experience    rating — compensation    in- 
surance, 177 
fire  insurance,  235,  240-242 


Face  value,   adjustment  of  in   life  in- 
surance, 69 
decreasing,   69 
disability,  70 
multiple   indemnity,   69 
Fellow  servant  doctrine,  157 
Fidelity    bonds,    339-342,    app.    CXV, 

CXVI 
Fiduciary  bonds,   339,  345 
Fire  insurance,    185-266 
Fire  insurance  binder,  210,  app.  XLI 
Fire     insurance     contract,     analyzed, 
199-221 
coverage,  202-210 
N.  Y.  Standard  policy,  app.  XXX 
Fire     insurance      policy,      automobile, 

306-310,  app.  CVII 
Fire  insurance  rates,  234-244 
Fire  underwriters'   associations,  juris- 
diction, 44-45,  app.  L 
maps  showing  jurisdiction,  app.  L 


Fixed  loss  ratio,  181-183 
Fleet  policies,  272 
Floater,    excess,    225-226 
Floating  policies,  fire,  224-225 

marine,  272 
Forms  and  clauses  used  in  fire  insur- 
ance,     222-233,      app.      XXXI- 
XLVIII 
descriptive  forms,  222-225 

covering  more  than  one   location, 

224-226 
description  of  property,  224 
location   of  property,  224 
ownership,  222-223 
those    covering    other    than    direct 
loss,    226-228 
profit  insurance,  228 
rent  insurance,   228 
sprinkler    leakage    insurance,   228 
use  and  occupancy,  226-228,  app. 
XL 
Formula,       compensation       insurance 
premium,   175 
life    insurance    reserve    calculation, 

98-99 
use  and  occupancy,  227 
Franchise  bonds,   339,   347 
Fraternal   insurance 

compared   with   old    line   insurance, 

128 
description,   126-128 
history,    126-128 
valuation,  app.  XIV 
Fraud,  effect  of,  217,  257-258 
Free  of  particular  average,  287,  app. 
LXXIV,       LXXXIII,       XCIII, 
XCV,  XCVIII 
F.  P.  A.  A.  C,  287,  app.  XCIII 
F.  P.  A.  E.  C,  287,  app.  XCV 
Freight  policies,  271 
Functions  of  insurance,  see  Uses,  3-18 


Gains,   from  forfeitures,    117 

from   investments,    117 
Gasoline    and   gas   permits,   230,   app. 

XXXVIII 
General   agents,   life   insurance,  40-41 

property  insurance,  42 
General  average,    281-283 
General  expenses,  84 
General  or    unlimited    accident    poli- 
cies, 142-143,  app.  XVIII 
Government  insurance,  3  5-38 
Gross  premiums,  83-88 


INDEX 


509 


Group  insurance 

method  of  insuring,  132 

nature  of  plan,  132 

the   premium,    133-135 
Guaranteed  mortgages,   319-320 
Guaranteed  mortgage  certificates,   320 
Guaranteed  values,  103-107 

H 

Household  form,  app.  XXXV 

Hull,   see   Vessels 

Hull  marine  policy,  app.  LXHI 

I 

"Illustrative"  dividends,   114,   116 

Immigrant  bonds,  348-349 

Inception     and     termination     of     fire 

policy,   210-213 
Incontestable  clause,   124 
Indemnity  bonds,  342-343 
Indemnity,  double,  69 

multiple,   69, 

principle  of,  187 
Industrial  accidents 

diseases,  157 

distribution  of,  156 

extent  of,  155-156 

prevention  of,   156-157 
Industrial   life  insurance 

origin  and  purpose,  129-130 

rates,  app.  VII 

the   system   explained,   130-132 
Industrial   or   corporate    accident   and 

health  policies,  144-145 
Injunction  bonds,  342 
Insolvency,  330-331 
Installment  insurance,  65-68 
Insurable    interest,    in    fire    insurance, 
187-198 
classification    of    insurable    inter- 
ests, 189 

in  general,  21-22 

in  life  insurance,  119-120 

in  marine  insurance,  269 
Insurance 

as  a  provision  for  old  age,  IS 

associations,  44 

brokers,  43-44 

certificates,   196,   app.  CIII 

definition  of,  19 

government,   35-38 

in  general,  3-50 

investment  feature,  13,  14,  59,  61,  62, 
64 

kinds  of 

accident     and     health     insurance, 
138-152 


automobile    insurance,   299-310 
corporate  bonding,   336-350 
corporation  insurance,   120 
credit   insurance,   322-335 
fire  insurance,   185-266 
liability  and  compensation   insur- 
ance, 153-184 
life  insurance,  51-137 
marine  insurance,  267-295 
mortgage  insurance,  see  Title  in- 
surance 
partnership  insurance,  120 
profit  insurance,  228 
rent  insurance,  228 
riot    and    civil    commotion    insur- 
ance, 204,  app.  LVII 
sprinkler   leakage   insurance,   228, 

app.  XXXIX 
title   insurance,   311-321 
use  and  occupancy  insurance,  226- 
228,  app.  XL 
organization  of  business,  39-50 

office  organization,  39-40 
prerequisites   of,    19-21 
principles  underlying,  19-27 
purposes,  3-18 
uses  of,  3-18 
Insurance  organizations,  tj'pes  of,  28- 

38 
Interest,  compound,  75-76 

policies  (marine),  271,  app.  LXXXI 
Interinsurers,   app.  LX 
Internal  revenue  bonds 
Investment  element  in  life  insurance 
endowments,  64 
limited  payment  life,  62 
ordinary  life,  61 
term  insurance,   59 
Investment  expenses,  84 
Investments,  permitted  classes,  108 


Joint  life  insurance,  68 

K 

Key  rate,  238 

Kinds  of  insurance,  see  Insurance 
policies,  see  insurance  concerned 
premiums,  see  Premiums  and  Rates 


Land  titles,   311-312,   see  Title   insur- 
ance 
Lapse,   105-107 
Last  survivor,  68 
Last  survivor  annuities,  69 


510 


INDEX 


Latent  defect,  288,  app.  LXXXIX 
Law  of  average,  23-24 

operation  of,  24-26 
Law  of  negligence,  157-158 
Laws,    compensation,    see    Compensa- 
tion Laws 
non-forfeiture,   104-105 
Laws  of  probability,  22-23 
Lawyer's  abstract,  312 
Legal    reserve,    life   insurance,    95-100 
Level  premium,  82-83,  90-91 
Liability  and  compensation  insurance, 

153-183 
Liability   and   property  damage   rates, 
automobile,    300-305,    app,    CX, 
CXI,  CXII 
Liability,  employers 
insurarice,  158 
policy,  158-159 
rates,   159-160 
Liability  policies,  automobile,  299-300, 

app.  CII 
License  bonds,  345-346,  339 
Life  compared  with  other  forms  of  in- 
surance, 26-27 
Life  insurance,  51-137 
Lighterage  clause,  app.  LXXXVIII 
Lightning  clause,  205 
Limited    accident    policies,    142,    app. 

XVI,  XVII 
Limited  payment  life  insurance,  61-63 
Limited   policies,   accident   and   health 
insurance,  143,  app.  XVI 
credit  insurance,  324 
Lloyds  Associations,  34-35,  app.  LX 
Loading,  of  premium,   83-88 

savings  from,  117 
Loan  values,  104 
Loans,  on  life  policies 
described,   106 
extent  and  nature,  106-107 
Local   associations,  47-50 
Location  of  property,  224 
Loss  payable  clause,  191,  195,  230,  app. 

XXXVII 
Loss  reserves,  compensation  insurance, 

178-183 
Loss  settlement,  fire,  256-265 

agreement  and  appraisal,  259-260 
classifications    of    policy    provisions 

relating  to,  256 
estimation   of   amount  of   loss,   257- 

259 
net  liability  of  company,  261-265 
preservation  of  property,  256-257 
Lost  instrument  bonds,  342 


M 

Mandamus  bonds,  342 

Manual  rate,  compensation  insurance, 

172,  app.  XXV 
Manufacturer's  cars,  304-305,   306-309 
Maps  of  Fire  Underwriters'  Associa- 
tions,  app.  L 
Marine  insurance,  267-295 
analysis  of  policy,  277-281 
associations,  294-295 
different  classes  of  policies,  271-273 
endorsements,  app.  LXV-C 
factors    affecting    marine    insurance 
rates,  291-295 
competition,  294-295 
nature  of  the  trade,  293 
policy  conditions,  295 
statistical  experience,  293-294 
subjects  of   insurance,   291-292 
the  insured,  292-293 
underwriting  judgment,  295 
factors   essential   to   valid   contract, 

269-270 
mutuals,  270,  app.  CI 
nature  of  contract,  269 
types  of  losses,  281-291 
types  of  underwriters,  270-271 
uses  of  policies,  273-277 
Medical   aid,   165 

examination,  app.  II,  59,  130 
Memorandum  clause,  app.  LXII 
Merit  rating,  compensation  insurance, 

175 
Methods  of  loading,  83-85 
Minimum    rates,    fire    insurance,    235- 

237 
Mobile  bill,  127 
Modified     preliminary     term     reserve 

valuation,   102 
Monthly    report,     (fire    agents),    app. 

XLVIII 
Mortality  savings,  116-117 
Mortality  tables 

American  Experience,  73-74 
National     Fraternal     Congress,    73, 
127 
Mortgage — chattel,  216-217 

clause,    192-194,    230,    app.    XXXII, 
XXXIII 
Mortgage   insurance,   see  Title   insur- 
ance 
Mortgagee,    policy    provision    relating 
to,  212,  219,  258,  261 
protecting  his  interest,  189-194 
Mortgagee's  risk,  title  insurance,  317- 
319 


INDEX 


511 


Mutuals,  30-32,  169,  270,  app.  XXVII, 
CI 

N 

Named  policies,  272 

National  associations,  45 

National  Board  of  Fire  Underwriters, 

45 
National  Fraternal    Congress    Table, 

127 
National  title  insurance,  319 
Natural  premium,  76-77 
Nature  of  suretyship,  336-337 
Negligence,  contributory,   157 
Net  cost,  114 

Net  single  premium,  78-83 
New  York  Conference  Bill,   127 
Non-cancellable    accident    and    health 

policies,  143-144,  app.  XVIII 
Non-concurrent  policies,  263-265 
Non-forfeiture  laws,  104-105 
Non-participating     policies,      110-111, 

114 
Noon,  meaning  of,  210 
Normal  loss,  332-333 


Obligee,   338 

Occupancy  table — Dean  Schedule,  240, 

app.  LIV 
Universal  Mercantile  Schedule,  238 
Occupation,  classification  for  accident 

rates,  149 
Open  cargo  forms,  272,  app.  LXII 
Open  or  unvalued  policies,  272 
Operation  of  law  of  average,  24-26 
"Optional"    policy,    credit    insurance, 

327,  app.  CXIII 
Ordinary  life,   59-61 
Organization    of    insurance    business, 

39-50 
Organizations,     types     of     insurance, 

28-38 
Origin  of  surplus,  110 
Owner's     risk,     title     insurance,    313- 

317 
Ownership  of  property,  218-219,  222- 

223 


Paid-up  insurance,  60-105 
Partial   disability,   147-165 
Partial    losses    in    marine    insurance, 
285-289 

cargo,  285-287 

freight,  289 

vessel,    287-289 


Participating  policies,  110-111 

tables  comparing  participating  with 
non-participating,    114 
Particular  average,  283 

free  of,  287,  app.  XCV 
Parties  to  fire  contract,  201 
Partnership  insurance,  120 
Passenger  cars,   300-301,  305-309 
Payment  of  claims  (life),  124 
Pecuniary  interest,   120 
Perils    covered     by    marine     policies, 

279-281 
Perpetual  policy,  245,  app.  XXIX 
Personal  insurance,  39-40,  Part  II 
Philadelphia     Contributionship,     plan 

of,  app.  XXIX 
Policies,  see  under  the  kind  of  insur- 
ance concerned 
Policy  loans,   106-107 
Policy  proof  of  interest,  marine,  271, 

app.  LXXXI 
Policy    provisions,    see    classifications 
and     analyses     under     various 
types  of  insurance 
Port  risk,  274 
Preliminary    term    reserve    valuation, 

101 
Premiums,    accident   and    health,    149- 

150 
Premiums,  credit  insurance,   327 
Premiums,  fire 

calculation,  etc.,  see  Rates 
policy    provisions    concerning,    201- 
202 
Premiums,  life,  71-78 
adjustment  of,  69 
decreasing,  69 
return  of,  69 
waiver,  69 
calculation   of 

annual     level     premiums,     82-83, 

app.  VI 
gross  premium,  83-88 
net  single  premium 
endowments,  80-81 
term   policy,   78-79 
whole  life,  79-80 
efi^ect  of  premiums  on  reserve,  89-93 
group  insurance,  133-135 
industrial    insurance,    130-131,    app. 

VII 
loading,  methods  of,  83-88 
sub-standard  lives,   137 
table  of  annual  rates,  54,  72,  app.  VI 
Premiums,  liability,  159-160 
Premiums,  marine,  see  Rates 


512 


INDEX 


Premiums,  title  insurance,   319 
Premiums,     workmen's    compensation, 

172-177 
Prerequisites  of  insurance,  19-21 
Preservation  of  property,  256-257 
Principal,  in  corporate  bonding,  337 
Principles  of  compensation   insurance, 

161-162 
Principles  of  insurance,  19-27 
Principles  of  probability,  22-23,  73-75 
Private   passenger  cars,   300-301,   305- 

309 
Probability,    application    of   theory   of 

probability  to   insurance,  22-23, 

73-75 
Profits   insurance,   228 
Proof  of  loss,  fire,  258,  app.  XLVI 
Proofs  of  death,  125,  app.  XII,  XIII 
Proper  policy,  53 
Propertv    damage    policies,    300,    app. 

CV 
Property  damage  rates,   300-305,   app. 

CX,  CXI,   CXII 
Prospective  reserve,  98-99 
Protection  and  indemnity  associations, 

271,  app.  LXIV  . 
Public  automobiles,  303-304,  306,  309 
Public  official  bonds,  343-345 
Pure  premium,   160,  173-175 

R 

Rates,    accident    and    health,    149-150, 

app.  XIX 
Rates,  automobile  insurance 
collision,  305-306 
fire,   306-310 
liability  and  property  damage,  300- 

305,  app.  CX,  CXI,  CXII 
theft,  310,  app.  CXI 
Rates,  corporate  bonding,  349-350 
Rates,  fire  insurance 
analytic  system,  239-240 
calculation  of 

Dean  Schedule,  240,  app.  LV,  LVI 
Universal     Mercantile     Schedule, 
237-239 
classification  of,  235 
Experience     Grading     and     Rating 

schedule,  239-242 
experience  rating,  235 
factors  involved,  234 
judgment  rating,  235 
minimum  rates,  236-237 
schedule  rates,  23 
schedule  rating,  235 
short  rate,  212,  236 


Universal  Mercantile  Schedule,  237- 
239,   app.   LI 
Rates,    marine    insurance,    factors    af- 
fecting 

competition,  294-295 

nature  of  the  trade,  293 

policy  conditions,  295 

statistical  experience,  293-294 

subjects  of  insurance,  291-292 

the  insured,   292-293 

underwriting  judgment,  295 
Rates,  life,  see  Premium 

table  of  annual  life  insurance  rates 
on  various  policies,  54,  72,  app. 
VI 
Rebates,  48 

Reciprocals,  32-33,  app.  LVIII-LX 
Reduced  rate  clause,  app.  XXXI 
R.  G.  Dun  &  Company,  328 
Regulations  (state)   fire 

(state)   life,  107-109 
Reinsurance  reserve,  245-246 
Release  of  interest,  124,  app.  X 
Renewable   feature,    57-59 
Renewal  commissions,  app.  V,  XLIX 
Renewal  receipt,  app.  XLIII 
Rent  insurance,  228 
Replevin  bonds,  342 
Representations,   124 
"Requirements  for  insurance,  19-21 
Reserves,    accident   and   health   insur- 
ance, 150 
Reserves  in  fire  insurance 

calculation  of,  249-253 

definition,  245 

diagram  showing  reserve,  250 

illustration    of    reserve    calculation, 
251 

importance  of 
financially,  247 
to  premium  payments,  246-247 

object  of,  245-246 

state  legislation  relating  to,  253-255 
Reserves,    liability    and    compensation 

insurance,  178-183 
Reserves,   life,  nature  of,  89 

calculation  of,  97-100 

diagram     showing     growth     of     re- 
serves on  various  policies,  93 

preliminary  term  reserve  tables,  102 

prospective,  98-99 

retrospective,  90-92,  99 

select  and  ultimate  table,  101 

size  and  importance,  95-97 

special   methods   of   valuation,    100- 
103 


INDEX 


513 


table    comparing    net    reserve    with 

cash  and  loan  values,  104 
table    comparing   terminal    reserves 
at  different  rates  of  interest,  94 
table   of   aggregate   and    individual 

terminal    reserves,   91 
table  of  reserves  on  different  kinds 

of  policies,  92 
valuation  of,  98-99 
Reserves,  surrender  values  and  loans 

(life),   89-109 
Retrospective  reserve,  90-92,  99 
Reversionary  annuities,  69 
Riot  and  civil  commotion  clause,  ma- 
rine, app.  XCIX 
Riot    and   civil    commotion    insurance, 
205,  app.  LVII 
S 
Salvage,  credit  insurance,  335 

marine  insurance,  290 
Saving,   made    possible    by   insurance, 

12-13 
Schedule  rates,  237 
Schedule     rating,     automobile     insur- 
ance, app.  CIX 
compensation      insurance,      175-177, 

app.  XXVI 
fire  insurance,  235,  app.  L-LVI 
Seaworthiness  of  vessel,  269-270 
Sectional  associations,  47-50 
Select  and  ultimate  reserve  valuation, 

102-103 
Selecting  proper  policy,   53 
Self-insurance,  28-30 
Services,  of  insurance,   see   Uses,  3-18 
of  national  associations,  46-47 
of  sectional   and   local    associations, 
47-50 
Settlement  expenses,  84 
Settlement     of     claims,     compensation 
insurance,    166-167 
fire   insurance,   256-265,   see  Losses 
life  insurance,  125 
Short  rate  table,  compensation   insur- 
ance,  app.  XXIII 
fire  insurance,  212,  236,  app.  XLIV 
Single  premium  policy,  54-55 

calculation    of    premiums,    see    Pre- 
miums 
Social   insurance,    155 
Special  contracts,    life    insurance,    68- 

70 
Special  forms   of   life   insurance,   126- 

137 
Special  methods  of  life  insurance  re- 
serve valuation,  100-103 


Special  types  of  marine  policies,  272- 

273 
Spontaneous  combustion  clause,  229 
Sprinkler  leakage  insurance,  228,  app. 

XXXIX 
Sprinkler  system,   230 
Standard  building,  238 
Standard  city,  238 
Standard  fire  policy,  199-221 
classification   of   provisions,  200-201 
extent  of  protection,  202-213 
parties  to  the  contract,  201 
rate,     premium     and     consideration, 

201-202 
suspension  and  voidance,  213-221 
Standard    mortgagee    clause,    192-193, 

app.  XXXII,  XXXIII 
State  fund,  36,  app.  XXVIII 
State  insurance,  36-38 
State     regulation     of     fire     insurance 

rates,  242-244 
State  supervision  and  regulation,  fire, 
242-244,  253-255 
life,   107-109 
Statement    of    income    and    disburse- 
ments,   life   insurance  company, 
97 
Stock  companies,  33-34 
Subrogation,  261-262,  281,  app.  C 
Sub-standard  lives 
description,  136 
method  of  rating,  136-137 
Sue    and    labor    clause,    289-290,    app. 

LXIII 
Suits,  261 
Surety,    see    corporate    bonding,    337- 

338 
Surety   bond,    individual,    app.    CXV 

schedule,  app.  CXVI 
Suretyship — see  corporate  bonding 
Surplus  and  dividends,  110-118 
Surplus,  in  life  insurance 
apportionment,  111-112 
distribution,  112-113 
origin,   110 
Surrender  charges,  103-104 
Surrender  of  policy,  app.  XI 
Surrender  values,  103-105,  app.  Ill 


Table  of  life   insurance   rates,   54,   72 
Table  of  ratings,      credit      insurance, 

329 
Table  of  surrender  values,   app.   Ill 


514 


INDEX 


Tables    comparing    participating    and 
non-participating    policies,     114 
Tables  of  mortality,  72 

American  experience  table,  74 
Tables  of  reserves 

aggregate   and    individual    terminal 

reserves,  91 
comparison  of  terminal   reserves  at 

different  rates  of  interest,  94 
individual     terminal     reserves     on 

different  kinds  of  policies,  92 
net    reserves    compared    with    cash 

and   loan   values,   104 
preliminary  term  reserve,   101 
select  and  ultimate  reserve,  102 
Term  insurance,  diagram  showing  in- 
creasing premium  on  term  pol- 
icy,   59 
life,  56-59 
Termination    of   policies,    fire,   211-213 

life,  125 
Theft  insurance,  automobile,  310 

rates,  310,   app.  CXI 
Theory  of  probability,  22-23 
Three-fourths  loss  clause,  231 
Three-fourths  value  clause,  231 
Ticket  accident  policies,    141-142 
Time  policies,  272,  app.  LXIII 
Title  insurance,  311-321 
abstract  plant,  312 
extent  of  business,  313 
extent  of  guarantee,  312-313 
guaranteed  mortgages,  319-320 
lawyer's  abstract,  311 
mortgagee's  risk,  317-318 
operations  of  title  company,  312 
owner's   risk,   313-317 
premium,    319 
special  policies,  318 
tract  system,   312 
types  of  policies,  313-319 
Tontine  policies,   116 
Total    disability,    146-147,    164 
Total   loss  in  marine  insurance 
actual,  284 
constructive,  284-285 
Tract  system,   312 
"Twisting,"    108 
Type  of  vessel,  291-292 
Types  of  insurance,      see      insurance, 

kinds  of 
Types     of     insurance     organizations, 

28-38 
Types  of  marine    losses,    281-291 


Types  of  marine   policies,   271-277 
Types    of    policies,    see    kinds    of    in- 
surance 

U 
Uncertainty,   elimination  of  by  insur- 
ance, 3-5 
Underwriters'    associations,  44 
Universal    Mercantile    Schedule,    237- 

239,   app.   LI 
Unlimited       policies,       accident       and 
health,    143 
credit   insurance,    324 
Unoccupancy,  216 
Use    and    occupancy    insurance,    226- 

228,  app.  XL 
Uses  of  insurance,    3-18 
Uses  of  marine  policies 
blanket  policies,   276-277 
fleet  policies,  276 
floating    and    named    policies,    275- 

276 
open  cargo  forms,  276 
ordinary  and  special  hazards,   277 
special  time  policies,   274-275 
time  and  voyage  policies,  274 
valued  and  open   policies,  274 
vessel,    cargo    and    freight    policies, 
273 

V 
Vacancy,  216 
Valid    and   collectible    insurance,   214, 

262 
Valuation,   of   fraternals,    app.   XIV 
of   life   reserves,   98-99 
of  life  reserves  by  special  methods, 
100-103 
Valued    policies,    automobile,    309 
fire,  204,  206 
marine,  272,   app.  LXIII 
Valued  policy  laws,  206 
Vessel,  partial   loss  of,  287-288 

policies,   271,   app.  LXIII 
Voidance  of  fire   policy,  217-221 
Voyage  policies,  272 

w 

War   risk  bureau 

statement   of   operations,    app.  XV 
War   risk   insurance,   36-38,   277 
Warehouse  to  warehouse  clause,  279, 

app.  LXXV 
Whole-life     insurance,     see     Ordinary 

Life 
Workmen's   collective   insurance,   145 


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